With funeral costs averaging around $9,420, many people wonder if any applicable tax deductions help reduce the financial burden. According to the IRS, individual taxpayers cannot claim burial or funeral expenses as itemized deductions on their tax returns.
Fortunately, there is an exception to this rule for eligible estates. If an executor uses a decedent’s estate to pay for their funeral, those expenses are deductible for determining the taxable estate.
Read on to learn what expenses can qualify as tax deductions and how to determine if an estate is eligible.
What Expenses Can Be Deducted?
To determine a decedent’s taxable estate, the IRS deems funeral expenses paid out of the estate as an allowable tax deduction. Those expenses are only deductible on the federal estate tax return (Form 706).
According to the IRS, itemized funeral expense deductions must be reasonable and necessary. This may include, but is not limited to, the following:
- The casket or urn
- Burial plot costs
- Tombstone/grave markers
- Funeral director service fee
- Costs associated with memorial services (minister hired to deliver the eulogy, transportation to the gravesite, florist fees, etc.)
As for filing a tax return of a decedent’s final income, medical expenses qualify as deductible expenses. Executors can claim them on Form 1040 or 1040-SR as long the medical expenses were paid before the decedent’s death for them, their spouse, or dependents.
Qualified medical expenses related to the treatment or prevention of a medical condition or illness, such as hospital fees, medical equipment and supplies, and prescription medication.
Expenses That Can’t Be Deducted
Since not all funeral and burial arrangements are considered necessary, some related expenses aren’t deductible. This may include travel expenses to the funeral, such as flights and car rentals for funeral guests.
Additionally, any reimbursed amounts, such as through death benefits payable by the Department of Veterans Affairs (VA) or the Social Security Administration (SSA), are not deductible funeral expenses.
Funeral expenses not paid by the decedent’s estate also cannot be deducted. This means that if a loved one of the deceased person pays for the funeral, the expenses do not qualify as tax-deductible for estate tax returns.
State Deductions for Funeral Expenses
Federal tax rules are separate from the state, and tax-deductible funeral expenses vary from state to state. That said, 12 states and Washington, D.C. still impose state estate tax even if an estate doesn’t have to file federal estate taxes. Each one also has a different taxable threshold for deductions.
Listed below are the states with estate taxes as well as each of their exemption levels:
|State/District||Estate Tax Threshold|
|District of Columbia||$4 million|
|New York||$6.1 million|
|Rhode Island||$1.7 million|
|Source: Tax Foundation|
How Estates Can Claim Deductions
There are particular rules that estates must follow to claim deductions on their tax returns. The three major funeral expense rules are as follows:
1. Use IRS Form 706: U.S. Estate Tax Return
Executors of a decedent’s estate must use Form 706 to claim funeral expenses and deductions on their tax returns. You cannot deduct funeral costs on an income tax return for estates and trusts (Form 1041).
2. Meet the filing threshold
Estates can only claim funeral expenses if the gross estate, including exemptions and adjusted taxable gifts) exceeds $12,920,000, which is the 2023 filing threshold. If the gross estate is less than the threshold, estates are not required to file a tax return. Unfortunately, they also cannot claim the funeral expenses as a tax deduction.
3. Exclude reimbursements
Itemized funeral expenses must exclude any amount reimbursed to the estate. This refers to any type of federal aid, such as death benefits from the SSA or VA, and any payment reimbursements from insurance policies.
How To Save On Nondeductible Expenses
Fortunately, there are still ways you can save on funeral costs if you’re not able to deduct the expenses from your taxes.
- Preplanned funerals: Prices of funeral packages and burial sites can increase over time. By purchasing and coordinating them early, you may be able to lock in the current price, saving money in the long run.
- Affordable funeral options: You can opt for cremation or nontraditional burial options, such as green burial, which are cheaper alternatives. Also, choosing smaller, more simplistic memorial services can help cut costs.
- Funeral Insurance: You can compare burial insurance policies covering end-of-life expenses. Many policies are easy to qualify for since they don’t require medical exams, and most companies accept applicants with pre-existing conditions.
- Disaster relief funds: If your family member or loved one passed away due to a federally-declared natural disaster, you may qualify for FEMA disaster financial assistance. These tax-free funds cover reasonable and necessary expenses, including funerals.
In most cases, no. Since the IRS deems life insurance a personal expense, premiums do not qualify as tax deductions. There are exceptions to this, depending on unique circumstances. It’s best to consult a tax professional in these cases.
No. Since payouts of burial insurance policies are tax-free, heirs are not subject to taxes. Generally, beneficiaries do not have to pay taxes on insurance payouts.
No. Medicare and Medicaid do not cover expenses related to burial, cremation, or funerals. They only cover hospital or medical-related costs. Though some states do consider Medicaid as an eligibility factor for funeral assistance.
Compare Funeral Expense Coverage Options
Filing taxes can be a stressful task, especially when you’re left in charge of handling the affairs of a departed loved one. Planning ahead is the best way to eliminate the financial burden of funeral costs and other death-related expenses on your family and loved ones.
With final expense insurance, you can take care of your end-of-life affairs, giving peace of mind to your loved ones.
- International Revenue Service (IRS)
- Tax Foundation
- Federal Emergency Management Agency (FEMA)
Disclaimer: This content is for informational purposes and should not substitute advice from a tax professional.