The short answer is unfortunately no. Costs and fees associated with creating your estate plan are generally not tax deductible. However, the Internal Revenue Service (IRS) publishes regulations regarding miscellaneous tax deductions in their Publication 529. This document details nondeductible items, including miscellaneous itemized deductions. It also discusses some miscellaneous items which you can deduct.
While some legal fees can be tax deductible, legal fees associated with estate planning are not. The following items are not tax deductible per IRS Publication 529:
- Trust administration fees and other expenses you pay for managing investments that produce taxable income
- Fees paid to brokers, trustees, or similar agents who collect taxable bond interest or dividends on shares of stock
- Trustee’s administration fees billed and paid separately by you in connection with an IRA
Although they are not deductions directly related to creating your estate plan, there are some items which can be deducted in connection with the administration of an estate. The following items can be deducted as itemized deductions and should be reported on your Schedule A (Form 1040) or Schedule A (Form 1040-NR):
- Excess deductions (including administrative expenses) allowed a beneficiary on termination of an estate or trust
A beneficiary can generally deduct the excess deductions that result from total deductions being greater than an estate’s or trust’s gross income, in the estate’s or trust’s last tax year. More information can be found in the Instructions for Schedule K-1 (Form 1041) for a Beneficiary Filing Form 1040 or 1040-SR.
- Federal estate tax on income in respect of a decedent
You can deduct federal estate tax that is attributable to income in respect of a decedent that you as a beneficiary include in your gross income. IRS Publication 559 offers more insights as to determining the amount of this deduction.
This information is current as of October 2021. Always consult with a tax professional or CPA if you have questions about these nondeductible expenses or other tax concerns.
What is the Difference Between Income Tax and Estate Tax?
Most people are all too familiar with the myriad of taxes you may encounter during your life. From sales tax, to income tax, and ultimately estate tax, understanding the differences can help you strategically plan for your future.
Income tax is a revenue source for different levels of government. This tax refers to a percentage of income generated by individuals and businesses that is paid to the government to support public services, pay government obligations, and other things. Income tax is generally assessed throughout an individual’s lifetime. In the United States we utilize a progressive rate structure which applies the lowest tax rate on the first level of an individual’s taxable income, then a higher rate on the next level of taxable income, until all of the taxable income has been accounted for.
Estate tax functions slightly differently than income tax. Estate tax, which some refer to as “death tax,” is a tax on the value of an individual’s estate at the time of their death. This tax is levied on the estate prior to making any distributions to heirs or beneficiaries. The goal of the estate tax is to limit the transfer of untaxed wealth from generation to generation, as well as generating revenue for the federal government. Some states also have their own versions of estate taxes, but California currently does not.
While estate taxation may seem daunting, only a very small percentage of people are ever subjected to the estate tax. Due to the high estate tax exemption amount, currently almost $24 million for a married couple and over $11 million for an individual, anyone whose estate does not surpass the exemption will not owe estate tax. Even if you are an individual whose estate will likely surpass the exemption amount, you can utilize the full exemption to reduce your estate tax liability significantly. This exemption is also subject to change in the coming years.
Again, always consult a tax professional or CPA when considering the implications estate and income taxation might have in your life. The estate planning attorneys at Weiner Law are available to discuss strategic planning with your estate tax goals in mind. Call us at (858) 356-9070 to schedule a free, no-obligation consultation. You can also visit our website to learn more about the consultation process.