How to Avoid Double-Dipping Deductions for a Decedent, Estate, or Trust
You may have realized that many of the deductions available on the Form 706 look familiar, and 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.
So choose. 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) and take the deductions on the return that’s 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 such as 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.
As with every rule, the double-dipping rules have a couple of exceptions. 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, but as the estate pays them, they also become an income tax deduction available to the estate.
And 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.
As the highest bracket for federal income tax (39.6 percent) and for estate tax (40%) are now essentially the same, if you have an estate that’s subject to both income and estate tax, it may make sense to figure the estate’s Form 1041 and Form 706 with and without the deductions that could qualify for either return and use the deductions that gives the estate the best result.
Don’t forget to take state income and estate/inheritance tax into consideration when you play with these numbers; remember, you’re trying to minimize the total taxes, not just the tax paid to either the federal or state government.