John Smith died on March 30, 2004. From January 1, 2004 to March 30, 2004, $2,000 in medical bills had been paid by John. The following additional medical bills were incurred and paid by the executor out of John’s estate:
1) From March 31, 2004, to December 31, 2004, in the amount of $5,000.
2) From January 1, 2005, to March 30, 2005, in the amount of $5,000.
3) From March 31, 2005, to April 6, 2005, in the amount of $3,000. The executor of John’s estate may elect to deduct what amount of the medical expenses (subject to percentage limitations) on John’s final income tax return, Form 1040, if deductions are itemized.
The answer is (C).
Medical expenses not paid before death are liabilities of the estate and are shown on the federal estate tax return (Form 706). However, if medical expenses for the decedent are paid out of the estate during the 1-year period beginning with the day after death, you can elect to treat all or part of the expenses as paid by the decedent at the time they were incurred. If you make the election, you can claim all or part of the expenses on the decedent’s income tax return (if deductions are itemized) rather than on the federal estate tax return (Form 706). You can deduct expenses incurred in the year of death on the final income tax return… So the expenses the executor can include in John Smith’s last tax return is the $2,000 + 5,000 + 5,000 = 12,000. The medical expense from March 31, 2005 to April 6, 2005 is outside the 1-year window and is not included in John’s return but rather the estate’s.