Let’s consider a simple hypothetical. Your aging father passes away, and as his executor you’ve just finished paying out cash from his estate for his funeral expenses. The thought crosses your mind – “I wonder if these costs are tax deductible?”

Or perhaps you’re setting aside funds for your own memorial service one day. You might wonder the same thing: “Will my spouse or my heirs be able to deduct this expense?”

It’s a question that comes up frequently – so much so that the Kiplinger financial website recently ran this article to help answer the question. The author is Anthony Martin, an insurance professional by trade, and he dives into the issues with what we felt is pretty good clarity. As it turns out, there may be times when your estate can benefit from tax deductible funeral expenses, but the bar is set pretty high. Let’s take a look.

Death Brings Emotional and Financial Pain

“The passing of a loved one is always a difficult burden to bear — physically, emotionally, mentally and monetarily,” Martin writes. Even in cases of protracted illness, death and passing almost seem to come as a surprise, leaving family members to carry the burden of shouldering the often-heavy burden of funeral expenses.  The issue of tax deductibility of these funeral expenses is bound to come up.

That’s especially true once families come to grips with what Martin calls “the cost of dying.”  He writes, “According to the National Funeral Directors Association’s General Price List Study in 2021, the national median cost of burial with viewing is $7,848, an increase of 6.6 percent since 2016. Meanwhile, cremation costs $6,971, recording a rise of 11.3 percent in the same period.”

Unless the deceased has some form of burial insurance, loved ones left behind must foot the bill. “This,” says Martin, “is why it is not surprising that it is often asked whether individuals can include funeral expenses paid in their itemized deductions to reduce their annual tax burden.”

Deducting Funeral Expenses: The Basics

Martin lays out the issue unambiguously. “An individual person who shoulders full or part of a deceased person’s funeral expenses cannot claim funeral or burial expenses on their individual itemized deductions as part of Schedule A of Form 1040,” he states,  according to an IRS info sheet called “Topic 502” which deals mostly with medical and dental expenses.

However, if the costs are being paid for out of an estate, the rules are slightly different. “Instead of an individual, only funeral expenses paid out of the estate (the funeral costs are paid by the estate of the decedent, and not just any single individual) are instead tax-deductible against the decedent’s gross estate to determine the net taxable estate and corresponding estate taxes, subject to a threshold.”

That’s a mouthful, and we’ll explain it below. But for most of us, the bottom line, says Martin, is clear. “Simply put, individuals cannot claim tax deductions on funeral expenses paid out of their own pocket, and only the deceased’s estate can benefit from the allowable tax deductions on funeral expenses.”

The Estate Tax Enters the Equation

As Martin explains it, funeral expenses are tax-deductible only in instances where the value of the estate triggers an estate tax. (We checked for our home state, Washington, and the same rule applies). “The reason why this is only tax-deductible to the estate, and not for individuals, is because an estate pays for estate tax in excess of the threshold set by the IRS,” says Martin. In 2023 that threshold is $12.92 million at the federal level. Estates below that value do not face federal estate tax but they might be taxed if they’re in one of 12 states with their own estate tax.

In our view, Martin’s Kiplinger report doesn’t state the issue clearly enough. “The deductibility of funeral expenses is a part of the tax relief offered by the IRS to the taxes to be paid by the deceased and his or her estate,” he writes, “thereby the rationale why only the deceased person’s estate is the only entity that can claim funeral expenses as tax deductions.”

Fortunately, however, he eventually arrives at greater clarity. The IRS allows estates to deduct funeral expenses from the value of an estate solely for the purpose of determining whether or not the estate has sufficient worth to trigger the estate tax.  “If the decedent’s gross estate does not reach the set threshold by the IRS,” Martin states, “the executor does not need to file a tax return and pay taxes, and the funeral expenses cannot be claimed as a tax deduction by the estate.”

Only “Reasonable and Necessary” Expenses Deductible

The article goes on to clarify which funeral expenses might be deductible and which are not. (Remember, only when the deceased person’s estate pays the funeral expenses can these costs potentially satisfy the tax collectors.)

For qualifying estates, the IRS will permit “reasonable and necessary” deductions for what might be thought of as the essential costs of memorial services. These can include a casket or urn and a burial plot. All services such as embalming, cremation, or what are now referred to as “green burial services” can be deducted as can be the cost of a tombstone. The IRS allows the estate to deduct funeral home costs which can include extras like meals, catering, and flower arrangements. The cost to transport the remains to the burial place is a deductible expense, as are fees for a religious service and costs of unreimbursed final medical expenses.

But be careful not to stray too far outside the allowable bounds, Martin warns. For example, the IRS won’t allow the estate to deduct transportation costs to the funeral of guests and family members – those are considered personal expenses and costs. (In other words, don’t plan a grand “destination funeral” in some island paradise and expect to write it off.) Also, obviously, the estate can’t deduct any fees covered by burial insurance if the deceased had a policy in force.

Martin has a caution for those who are settling the estate. “If you are the executor or administrator of the estate,” he writes, “keeping all the necessary receipts and documentation on all funeral expenses can help substantiate an estate’s claims on funeral expenses and potential litigation cases.” We would argue that keeping all such estate-related paperwork is common sense until your work as executor is done.

Preparing Your Loved Ones for Funeral Expenses

There’s more to the Kiplinger article for which we lack the space, but Martin does offer suggestions on why planning ahead for memorial costs is essential. “The fact of the matter is that funeral expenses are very expensive, whether they are deductible or not,” he concludes. “Bleeding out cash for an unforeseen event like a funeral is most likely to hurt your savings and emergency fund.”  Still, there are certain tools that can ease the burden for loved ones.

• Burial insurance: These policies help cover funeral arrangements, direct burial costs, medical bills, and even outstanding debts. Just be certain the monthly premiums are manageable.
• Prepaid funeral plans: These plans require advance payment to a funeral home, either in full or in monthly installments. But watch out: if you move, benefits may not be transferable.
• Funeral funds: “You can set up a separate funeral fund that your loved ones can access at the time of your death,” Martin suggests. Starting early allows even small monthly deposits to add up.

Rajiv Nagaich adds one more idea that, frankly, we’re surprised Martin didn’t mention. “If you set up a designated life insurance policy, and let your loved ones know that the proceeds are there to cover your final expenses, that might be a safe and simple way to avoid burdening them with the costs of your memorial. And,” he adds, “there’s another benefit: life insurance proceeds are non-taxable!” We hope this tip helps you plan more effectively.

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(originally reported at www.kiplinger.com)