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Tax Considerations When a Loved One Passes Away (Part 2)

If you become an executor of your loved one’s estate, you may have some important tax decisions to make. Here are some quick thoughts.

The decedent’s medical expenses provide you with planning opportunities to

  • deduct as itemized deductions (subject to the 7.5 percent floor) not only the medical expenses incurred during the taxable year of death, but also those unpaid at the date of death but paid within one year of death; or
  • deduct in full (no floor) the medical expenses paid after the date of death against the federal estate tax.

You, as the executor, may need to file

  • the decedent’s final Form 1040,
  • the estate’s Form 1041 income tax return, and
  • the estate’s Form 706.

You won’t need to file Form 1041 when all the decedent’s income-producing assets bypass probate and go straight to the surviving spouse or other heirs by contract or by operation of law—assets such as

  • real property that is owned by joint tenants with right of survivorship,
  • qualified retirement plan accounts and IRAs that have designated account beneficiaries, and
  • life insurance death benefits that are paid directly to designated policy beneficiaries.

If the estate is valued at $11.58 million or less and the decedent did not make any sizable gifts before death, you don’t have to file Form 706. But even if you don’t have to file Form 706, you may want to file it anyway to preserve the portability election.