Executors needing to file a federal estate income tax return must track the administration expenses of the estate. In general, the IRS allows for the deduction of administration expenses from the gross income of the estate. Therefore, in addition to tracking income of the estate, the executor must also track the administration expenses of the estate.

Track the Administration Expenses

The IRS allows for the deduction of administration expenses for estate taxes or estate income taxes, but not both. Since common estates are small enough to avoid estate taxes, the executor may use the deduction on the federal estate income tax return. As a result, the executor must track the following administration expenses most commonly used:

1. Executor fees.
2. Attorney fees.
3. Accounting fees, including tax preparation fees.
4. Expenses for management, conservation, or maintenance of estate property.

Fortunately, the executor should already be tracking the administration expenses mentioned above. Since the payment of fees come from the estate account, the executor doesn’t need to do anything elaborate. Anyway, to benefit from deducting administration expenses, the executor must accurately track the administration expenses.

Other Deductions for an Estate

In addition to deducting administration expenses, the IRS allows many more deductions for the federal estate income tax return. The following additional deductions come with some limitations:  

1. Charitable deductions – An estate can use charitable deductions only if provided for in the will. Also, the contribution must be from the estate gross income.
2. Capital Losses such as a loss on the sale of a home or sale of stocks.
3. Depreciation and depletion.
4. Income Distribution Deduction – The IRS allows for a deduction for the tax year in which income must be distributed to beneficiaries. However, the deduction is limited to the distributable net income of the estate.

A Note about the Estate Income Tax for States

Some states require a state estate income tax return along with the federal estate income tax return. In these states, deductions may be different than the federal estate income tax return. For instance, in Massachusetts, only executor compensation is deductible for administration expenses. In addition, Massachusetts has the Income Distribution Deduction, but with numerous limitations. So, executors need to be aware of their state tax laws regarding estate income taxes; they may not mirror the federal estate income tax laws.

Conclusion

The IRS allows numerous deductions for the federal estate income tax return. Moreover, some of the deductions allowed require difficult calculations. As a result, preparing and filing the federal estate income tax return becomes a complex task. However, as executor, most of the information needed to figure the deductions accrue in the course of administering the estate. So, it’s not too difficult to track, compile, and send the information to a tax professional.

Was this article helpful? Do you understand what administration expenses qualify as a deduction? Share your comments or questions in the comment area below.

Recommended Articles

Tax Returns and the Date of Death – Refer to this article to review the requirement for the federal estate income tax return.

Track the Estate Income – Refer to this article on how to track the estate income. The tracking of information for tax purposes should be done in a similar way.

Reference

IRS Publication 559 Survivors, Executors, and Administrators