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Computing Income Tax Deductions For Estate Tax

The estate tax is a tax imposed on the transfer of the taxable estate of a deceased person.  Certain states levy it as an inheritance tax.  The federal estate tax is imposed on the transfer of taxable estate of every decedent who is a U.S.citizen or resident.  In order to arrive at a smaller amount taxable estate, certain deductions are allowed from the gross estate.  A gross estate is the value of all the property interests of the decedent at the time of death.  A gross estate includes more property than that included in the probate estate under the property laws of the state in which the decedent lived at the time of death.  The calculation of an individual’s gross estate upon death includes all property the decedent owns or has an interest in.  After determining the value of a gross estate, the law provides for various deductions in arriving at the value of the taxable estate.  The deductions include:

  • Funeral expenses, administration expenses, and claims against the estate;
  • Charitable contributions;
  • Certain items of property left to the surviving spouse; and
  • Inheritance or estate taxes paid to states.

The rate of an estate tax is determined by the value of a deceased person’s assets rather than the amount each inheritor receives.  The deductions for the estate tax are provided in the Internal Revenue Code.  The general rule for allowance of deduction is that a person who includes an amount in gross income shall be allowed to deduct an amount which is the same for estate tax in the same taxable year.  The methods for computing a deduction are provided in the Internal Revenue Code[i].  The income tax deduction for the estate tax in a decedent person’s gross estate is computed on the basis of the net value of all items of income in respect of the decedent.  It is found by adding up the items and subtracting all allowable deductions.  The amount of federal estate tax attributable to the net value obtained is found by computing the federal estate tax that would be due if the net value is excluded from the gross estate.  The amount thus obtained is subtracted from the estate tax actually imposed on the estate.  The difference obtained is the estate tax attributable to the net value.  The allocatable share of income of each recipient with respect to the decedent in the estate tax is obtained by multiplying the estate tax by the gross estate value of the income the decedent reported by the recipient.  When the amount reported is actually lower than the gross estate value, share of each recipient is decided by dividing the total gross estate value of all income in respect of the decedent.

[i] 26 USCS § 691

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