MEDICAL EXPENSES

Substantial un-reimbursed medical expenses are often incurred in the year of death. Such expenses are generally not paid until after death. The general rule is that medical expenses are deductible when paid.

However, an election can be made that will allow you to deduct medical expenses in the year incurred (rather than when later paid) as long as they are paid within one year of the date of death.

The election is made on Form 1040 (see example below). Alternatively, you may elect to deduct medical expenses on the estate tax return (Form 706) in lieu of an income tax deduction. However, since there is rarely any estate tax due at the death of the first spouse, it will almost always be preferable to elect to take medical expenses as an income tax deduction.

Medical expenses may not be deducted from trust or estate income (Form 1041).

INCOME TAX DEDUCTION FOR ESTATE TAX PAID

Income in respect of a decedent, or “IRD,” is income earned during the life of the decedent that is paid out after death. Typical items of IRD include pension, IRA, and 401k distributions, bond interest, annuity payments, as well as the decedent’s last paycheck.

Since IRD is subject to both income and estate tax, it is subject to double tax. Fortunately, recipients of IRD are entitled to an income tax deduction that somewhat offsets the effect of the double tax.

The amount of the deduction is determined by computing the Federal estate tax with the IRD included and then re-computing the tax with the IRD excluded. The income tax deduction is the difference between the two results.