Administering an estate can be an expensive proposition. As executor, your expenses may range from hiring an accountant or attorney to paying for photocopies of important documents. The estate accounts will cover the cost of any legitimate, necessary administrative expenses. The estate can then claim a tax write-off for the costs. You might have more than one option for taking the deduction.
Estate or Income Tax
As executor, you can claim your expenses as a deduction on either the estate tax form or the estate's income tax return. You can't claim the same administrative expenses on both. If the estate doesn't need to pay estate tax, you'll have to use the income tax form. Most estates don't owe estate tax. As of the time of publication, the tax only affects estates worth more than $5.43 million. You report estate tax, including any deductions, on Internal Revenue Service Form 706. The estate income tax return is Form 1041.
Choosing the Right Form
If the estate does have to pay both taxes, it's up to you which form to report the expenses on. You can put everything on one form or report some of the deductible expenses as an income tax write-off and the rest as an estate-tax deduction. Attorney Deidre Wheatley-Liss says on her website that in most cases the estate gets a better deal if you take the deductions on Form 1041. This is particularly true if the estate assets are generating more taxable income. The write-offs can reduce the tax due on the income.
If the IRS audits the estate's taxes, you'll have to be able to prove any deductions you claimed. Fortunately, that's an obligation for executors anyway. You have to show the probate court that whatever money you took out of the estate went to legitimate expenses rather than to line your own pocket. That requires keeping records and detailed receipts of all your expenses, as the American Bar Association recommends. Those same receipts should prove to the IRS your deductions are on the level.
If you have to file Form 706, you usually report your administrative expenses in Schedule J. The schedule includes sections for funeral costs, attorney fees, accountant fees, miscellaneous costs and your fee for your work as executor. You enter the Schedule J total on Part 5 of the 706. For the 1041, you list the deductions on the front of the form. You also attach a statement saying that you're not claiming the same deductions against the estate tax.
- Justia: Deduction for Expenses of Administering Estate
- Internal Revenue Service: Survivors, Executors and Administrators
- Internal Revenue Service: Estate Tax
- Deidre R. Wheatley-Liss: Excess Estate Expenses Can Be Windfall to Beneficiary
- American Bar Association: Guidelines for Individual Executors and Trustees
- Internal Revenue Service: Form 706
- Internal Revenue Service: Form 1041
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