Are probate fees tax deductible?
If you’re serving as the executor or administrator for an estate, you may be wondering how probate finances work. How do you pay for probate? Is money you spend tax deductible? Will you be reimbursed?
Here’s the first thing to understand: the estate is responsible for any costs associated with probate, not you as an individual.
When we’re talking about tax-deductible probate fees or the cost of estate administration, we’re talking about the tax return for the estate. You as an individual cannot deduct estate administration expenses on your personal tax return.
Why? Because personal legal fees are not tax-deductible for individuals.
So what can you deduct on an estate tax return? Are probate fees tax deductible? Are funeral expenses tax deductible?
Let’s start with a little background.
Filing tax returns during probate
One of your responsibilities as the executor of an estate is to file the final tax return for the deceased individual. You’ll file the tax return — generally using IRS Form 1040 — as if they were still alive, and you’ll report any income they received until the date of their death.
Just like on a regular tax return, you can also list any credits or deductions they would have been eligible for. If they receive a tax refund, that money flows back into the estate.
You may also be responsible for filing an estate tax return on behalf of the estate. The U.S. government treats estates as separate legal entities from the deceased, and the tax return you file has a specific name: a fiduciary return.
You are required to file a fiduciary return (using IRS Form 1041) within 12 months of the deceased’s death if the estate generated $600 or more of gross income during the tax year. You’ll have to file again for any tax year that the estate remains open, as long as the estate generates the income limit.
How can an estate generate income? Through investment properties or accounts, unpaid salary, or the sale of real estate. Note that sometimes an estate may not earn income but will still need to file an estate income tax return. That’s the case when the executor sells estate property, such as the deceased’s home. Even if the sale didn’t result in a gain (income), the IRS will want to review to determine whether the sale created taxable income. In the event of an inherited property, any proceeds from the sale are considered inheritance and don’t count as taxable income for the estate.
You also have to file a fiduciary return if any beneficiary of the estate is a nonresident alien.
Deductions on fiduciary returns
The estate is only required to pay federal taxes if the taxable value of the estate exceeds $11.7 million. Each state sets its own estate tax exemption amount, and many states don’t have an estate tax at all.
Most estates don’t exceed the federal estate tax exemption, but some executors are surprised to find that real estate or investments have created a more valuable estate than they realized.
Some deductions can help reduce the taxable value of the estate.
Are funeral expenses tax deductible?
Yes, the estate can deduct funeral expenses that it has paid for. That means the estate has to reimburse any individual who helped cover the cost of funeral expenses before it can deduct those funds. If you have to pay the funeral home upfront because the estate funds aren’t available yet, the estate must reimburse you.
An estate can deduct funeral and burial expenses, such as the cost of moving the body, the cost of the tombstone and burial plot, and the cost of a memorial service.
Are estate administration fees tax deductible?
If you incurred expenses managing the estate, you can deduct those on the estate’s tax return. These might include costs like attorney or accountant fees or the cost to use a service like EZ-Probate.
The estate can also deduct any executor fees it paid you for the services you provided as personal representative of the estate.
Filing an estate tax return — a fiduciary return — can be complicated if you’re dealing with a large or complex estate. Reach out to an accountant or tax advisor if you’re concerned about the accuracy of your return.
If you have questions about the probate process or your role as an an executor, schedule a free consultation with one of our probate specialists. We’ve helped thousands of executors efficiently and affordably move through probate.