Deductions on an Estate Income Tax Return
The federal estate tax can take huge chunk of money out of an estate, with the estate tax rate currently at 45 percent. Fortunately, you can claim some deductions that will result in a lower tax liability.
Technically, an estate pays a federal “estate” tax and not an “income” tax, but people often use the terms interchangeably. The estate tax applies only to certain estates that are large enough.
As of 2017, the estate tax only applies to estates worth at least $4.5 million, but as of 2019, that threshold is reduced to $1 million. Claiming deductions on an estate tax return can save a lot of tax money by reducing the taxable estate.
Before you claim any deductions, you first have to calculate the “gross estate” which is basically the total property value of the estate, including cash, property, investment accounts and life insurance proceeds. You then calculate the “taxable estate” by reducing the gross estate by the total amount of deductions that you claim.
Estate tax deductions include: funeral expenses paid out of the estate, person debts owed at the time of the deceased’s death, a marital deduction, charitable contributions and state death taxes paid by the estate.
When a person dies, that person most likely owes some money to one or more creditors. These personal debts of the deceased must be paid out of the gross estate, which is why the federal government allows the estate to claim a deduction on all amounts used to pay off the debts.
You can also claim a marital deduction equal to the amount of money and property that passes to the deceased’s surviving spouse.
For example, if husband dies and has a gross estate worth $4 million, but he bequeaths his entire estate to his surviving wife, then husband’s estate will not have to pay any estate taxes because the entire amount is deducted.
You can also claim a deduction equal to the fair market value of all property donated to a qualified charitable organization, such as a church, university, or thrift store. So in the example above, if husband instead gave $2 million to his alma mater, and the remaining $2 million to his surviving wife, his estate would again avoid taxation.
State Death Taxes
Finally, you can deduct state death taxes paid out of the estate. State death taxes are similar to the federal estate tax, just on a state level. Not all states, however, impose a death tax, but some do, and if your state does, you can deduct the amount actually paid.