How to Avoid Double-Dipping Deductions for a Decedent, Estate, or Trust
When preparing a decedent’s final income tax Form 1040, or an estate or trust’s Form 1041, it is important to be aware of any deductions that may already have been taken on the estate tax Form 706. Many of the deductions available on Form 706 are the same as ones listed on Forms 1040 and 1041.
You may be wondering if you can have it both ways, deducting them the first time on the 706 and then again on the 1041. Well, you can’t. In fact, the IRS refers to this practice as double dipping and seriously frowns upon it.
When you have an estate that owes estate tax, compare the tax rates for the estate tax and the income tax. The estate tax is almost always higher. Take the deductions on the return that is paying a higher rate of tax.
On the other hand, if you must file a 706 but won’t owe any estate taxes (perhaps because of a surviving spouse and an unlimited marital deduction), deduct only things like funeral expenses and debts of the decedent (which aren’t deductible on the 1041) on the 706. Include all estate administration costs on the 1041.
The double-dipping rules have a couple of exceptions:
Real estate taxes: Real estate taxes that have been assessed but not paid as of the date of death are a valid debt of the decedent on Form 706. As the estate pays them, they also become an income tax deduction available to the estate.
Medical expenses: Medical expenses billed after death are a debt of the estate on the 706, but you can include them on the decedent’s final Form 1040 as a medical deduction.
Just to let the IRS know that you haven’t double dipped, you must attach a signed statement that any deductions taken on the estate’s Form 1041 haven’t been taken on the estate’s Form 706.