13.5 Considerations Affecting Income Taxes

• Library: A Lawyer's Guide to Estate Planning: Fundamentals for the Legal Practitioner (ABA) (2018 Ed.)

13.5 Considerations Affecting Income Taxes

13.51 Medical Expenses

Expenses for the decedent's medical care paid by his or her estate during the 12-month period following the date of death can be deducted on either the decedent's final income tax return or the estate tax return.²⁷ To determine whether the deduction should be taken on the final income tax return or on the estate tax return, one must compare the marginal tax rates applicable to each return. Current income tax rates range from 10% to 39.6%, whereas estate tax rates are 40%.

Caution: In estates greater in amount than the exclusion amount ($11,200,000 in 2018), the estate should not automatically take the deduction because the estate may owe no estate tax due to the exclusion amount and the marital deduction for the surviving spouse. Obviously, if the estate will owe no estate tax, the deduction should be made on the decedent's final income tax return.

Planning Pointer 7

If possible, the medical expenses should be paid before death. Then an income tax deduction is still available for the decedent's final income tax return, but the gross estate has been reduced by the medical expense payment, which then reduces the amount of estate tax.

13.52 Series E and EE U.S. Savings Bonds

Individuals owning Series E and EE U.S. Savings Bonds may elect to recognize currently the annual increase in the redemption value of their bonds; however, most individuals defer recognizing the increase (interest income) until the bonds are redeemed.²⁸ When an individual dies owning bonds with untaxed income accrued on them, there are three options available to the estate.

First, an election can be made to pay the income tax on all previously deferred income from the bonds on the decedent's final income tax return. If this election is made and the bonds are not redeemed, annual income recognition will be required thereafter. This may be a good option if the decedent died early in the tax year and has little other income. Also, the increase in the income tax liability resulting from the inclusion of this income on the decedent's final income tax return will increase the deduction for estate debts on the estate tax return, thus reducing the estate tax liability.

Second, if the election is not made on the decedent's final income tax return, it can be made on the estate's fiduciary income tax return. The income tax can even be deferred until the filing of the final fiduciary income tax return. The income accrued up to the...