An individual’s gross estate upon death includes all property the decedent owns or in which he has an interest. Any income that a decedent is entitled to receive should be included in the estate’s gross income[i].
After determining the value of the 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.
Apart from these deductions, an number of deductions are allowed for business or non business expenses, interest, taxes, and depletion or foreign tax credit, with respect to a decedent during the taxable period in which falls the date of his/her death[ii].
The said deduction for business or non business expenses, interest, taxes, and depletion or foreign tax credit is allowed in the taxable year when the expenses are paid to the estate of the decedent[iii].
However, if the estate of the decedent is not responsible for discharging the obligation to which the deduction or credit relates, the deduction is available to the person who, by reason of the death of the decedent or by bequest, devise, or inheritance acquires from the decedent an interest in property of the decedent.
A deduction is also available for depletion to the property held by the estate in the taxable year when income is received[iv]. The deduction should be apportioned between the estate and the heirs, legatees, and devisees on the basis of the income of the estate allocatable to each[v].
The term estate tax means the tax imposed on the estate of the decedent, reduced by the credits against such tax[vi]. A person who is required to include in gross income for any taxable year certain income, with respect to a decedent, may deduct in the same taxable year that portion of the estate tax imposed upon the decedent’s estate which is attributable to the inclusion of the right to receive such amount[vii].
In the case of an estate or trust, the amount available as a deduction is computed by excluding from the gross income of the estate or trust the portion of gross income with respect to a decedent which is properly paid, credited, or to be distributed to the beneficiaries during the taxable year[viii].
The income tax deduction for 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. Income tax is found by adding up the items and subtracting all allowable deductions.
Where property was sold by a decedent before his death but the gain is recognized by the heirs for income tax purposes as income in respect of a decedent, or where a dividend was payable before the decedent’s death but not paid until after his death, the recipient of the income is allowed a deduction for the estate tax.
For the purpose of computing: the capital loss limitation, the limitation on tax of a noncorporate taxpayer with capital gains, the fifty percent exclusion for gain on stock in a qualified small business corporation, and the alternative tax on a corporation’s capital gains, the amount taken into account with respect to income of a decedent should be reduced (but not below zero) by the amount of the deduction for estate tax attributable to that item of income[ix].
Further, the estate or beneficiary of a deceased employee who realizes ordinary compensation income from an incentive, or employee stock purchase plan option received from the decedent is entitled to an income tax deduction for estate tax on the value of the option included in the decedent’s estate, to the extent of the ordinary income realized from the option. However, no deduction is allowed for estate tax on the value of the option to the extent that income realized from the option is taxable as capital gain.
The medical expenses that are paid from a decedent’s estate will be deducted from the gross income if the following conditions are satisfied[x]:
- such expenses are paid within a period of one year from the date of the decedent’s death;
- such expenses are not deducted for the federal tax purposes; and
- such expenses are paid for the expenses incurred for medical care extended to a decedent.
Further, if after the annuity starting date, payments under the contract cease by reason of the death of an annuitant and there is unrecovered investment in the contract, the amount of such unrecovered investment is allowed as a deduction to the annuitant for his/her last taxable year[xi].
[i] Halliday v. United States, 655 F.2d 68 (5th Cir. Ala. 1981)
[ii] 26 USCS § 691 (b)
[iii] 26 USCS § 691 (b) (1)
[iv] 26 USCS § 691 (b) (2)
[v] 26 USCS § 611
[vi] 26 USCS § 691(c) (2) (A)
[vii] 26 CFR 1.691(c)-1 (a)
[viii] 26 USCS § 691(c) (1)
[ix] 26 USCS § 691 (c) (4)
[x] 26 USCS § 213
[xi] 26 USCS § 72 (b) (3) (A)