Medical Expense Deductions on the Decedent’s Final Return

Use this step-by-step guide to decide if you can claim medical expenses, loss deductions such as a net operating loss, and tax credits on a decedent’s final income tax return, or whether those items belong on the federal estate tax return instead. The rules below reflect 2025 federal guidance in the United States 🇺🇸 and focus on how an executor or personal representative can make smart elections that lower overall taxes while staying within IRS limits.

Quick Eligibility Snapshot: Yes/No Checks You Can Use Right Now

• Medical expenses paid before death
  • Yes, usually deductible on the decedent’s final Form 1040 if itemizing and the costs exceed 7.5% of AGI.
• Medical expenses unpaid at death
  • Yes, they’re liabilities of the estate and normally go on the estate tax return (Form 706), unless the executor elects to treat them as paid by the decedent (if the estate pays them within one year after death).
• Executor’s one-year election for unpaid medical bills
  • Yes, allowed if the estate pays the expenses within one year after the date of death. The executor must attach a statement to the final Form 1040. This election is irrevocable.
• Net operating loss and capital losses
  • Yes, the decedent’s prior-year net operating loss (NOL) and any capital loss carryovers can be used, but only on the final Form 1040. They do not carry to the estate’s income tax return.
• Tax credits (EIC, Child Tax Credit, and others)
  • Yes, credits that applied before death can be claimed on the final return, even if the tax year covers fewer than 12 months.

Direct links to official IRS materials you may need:
– Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return: https://www.irs.gov/forms-pubs/about-form-706
– Form 1040, U.S. Individual Income Tax Return: https://www.irs.gov/forms-pubs/about-form-1040
– IRS Publication 559 (Survivors, Executors, and Administrators): https://www.irs.gov/forms-pubs/about-publication-559
– IRS Publication 502 (Medical and Dental Expenses): https://www.irs.gov/forms-pubs/about-publication-502

According to analysis by VisaVerge.com, the biggest savings for families often come from two choices: whether to itemize medical expenses on the final Form 1040 and whether to make the one-year election for unpaid medical bills instead of taking them on the estate tax return.

Can You Deduct Medical Expenses Paid Before Death?

Short answer: Yes, if you itemize on the final return and the total qualified costs exceed 7.5% of the decedent’s AGI.

What counts
– Qualified medical expenses include costs the decedent paid for their own care, and also for their spouse and dependents.
– The expenses must have been paid before death.
– Only the portion above 7.5% of AGI is deductible.

You qualify if
– The final Form 1040 uses itemized deductions instead of the standard deduction.
– You can document the date, amount paid, and the person treated (decedent, spouse, dependent).
– Medical expenses exceed 7.5% of AGI for the final tax period.

You do not qualify if
– The decedent did not pay the expenses before death (those are usually unpaid liabilities belonging to the estate unless you make the one-year election).
– You cannot document the expenses.
– You plan to take the standard deduction and itemizing provides no advantage.

Example
– AGI on the final return: $80,000. The 7.5% threshold is $6,000.
– Qualified medical expenses paid before death total $9,500 → $3,500 deductible on Schedule A.
– If the decedent paid $2,000 for a spouse’s surgery before death, that amount adds to the medical total if it meets the rules.

Practical tip
– Keep original statements and proof of payment. Your file should show the date, the amount, and who received care to support deductions if the IRS asks.

What About Medical Expenses Unpaid at Death?

Default rule
– Unpaid medical expenses become liabilities of the estate and are reported on the federal estate tax return (Form 706) if the estate files one.

The one-year election that changes everything
– If the estate pays those medical expenses within one year after the date of death, the executor may elect to treat them as if the decedent paid them when incurred.
– If you make this election, the estate does not deduct those amounts on the estate tax return. Instead, you can deduct them on the decedent’s final Form 1040 as itemized medical expenses (still subject to 7.5% of AGI).
– The executor must attach a statement to the final Form 1040 specifying the amount treated as paid by the decedent and confirming the election. This election is one-time and irrevocable.

When to consider the election
– Consider the election if:
– The decedent’s final-year AGI is high enough that medical expenses above 7.5% deliver a large deduction on the final return.
– The estate is unlikely to owe estate tax, or the income tax deduction on the final Form 1040 provides greater benefit than the estate tax deduction on Form 706.

When to keep the expense on Form 706
– Keep it on Form 706 if:
– The estate is taxable and reducing the taxable estate value gives a larger total tax savings.
– The decedent’s final AGI is low and the 7.5% threshold would eliminate most of the deduction on the final Form 1040.

Example election scenario
– Unpaid hospital bills: $60,000. Estate pays them 8 months after death.
– Executor runs two projections:
1. Deduct on estate tax return (reduce the taxable estate).
2. Elect to treat amounts as paid by the decedent and deduct on the final Form 1040 (subject to 7.5% of AGI).
– The executor chooses whichever projection lowers combined taxes the most. If Projection B saves more income tax and the estate is under the exemption, the election often makes sense.

Important guardrails
– No double deduction: You cannot claim the same dollar on both the final return and the estate tax return.
– One-year payment window: The estate must actually pay the bills within one year after death to use the election.
– Attach the election statement: Include the written election with the final Form 1040 and keep copies in the estate file.

Do You Qualify to Use a Decedent’s Net Operating Loss or Capital Losses?

Short answer: Yes, but only on the final Form 1040. They do not move to the estate’s income tax return.

What qualifies
– A prior-year net operating loss (NOL) of the decedent.
– Capital losses and capital loss carryovers that belonged to the decedent.

Where and when you can use them
– These losses can be claimed only on the decedent’s final Form 1040. If not used there, they expire.
– You cannot claim them on the estate’s income tax return; the estate starts fresh for its own tax attributes.

You qualify if
– The decedent had an NOL or capital loss carryover from prior years, and the final return can use them under the usual rules.
– There is reportable income on the final return that the loss can offset (subject to capital loss limits).

You do not qualify if
– You try to carry unused decedent losses into the estate’s own income tax filings.
– There is no income to absorb the loss, or statutory limits block use. Any unused amount expires with the decedent.

Example
– Decedent has a $15,000 capital loss carryover. On the final Form 1040, up to $3,000 can offset ordinary income (individual limit). The remainder offsets capital gains if present. Any leftover after the final return expires.

Planning move
– Coordinate timing of final income items (for example, final payouts) with the use of losses to avoid “wasting” an NOL or capital loss carryover.

Can You Claim Credits on the Final Return?

Short answer: Yes. Credits that applied before death (such as the Earned Income Credit or Child Tax Credit) can be claimed on the final Form 1040, even if the tax year is shorter than 12 months.

You qualify if
– The decedent met the normal credit rules before death.
– You have documentation to show eligibility.

You do not qualify if
– The decedent didn’t meet the credit rules during life.
– You seek credits for periods after death or for people who are not the decedent’s spouse or qualifying dependents.

Key point
– The short tax year does not cancel credits. If the decedent was eligible during life, claim them.

When Must You File an Estate Tax Return?

Federal exemption for 2025
– For decedents dying in 2025, the federal estate tax exemption is $13.99 million per person (or $27.98 million for a married couple using portability). This helps determine whether you need to file Form 706.

State rules can differ
– Some states have their own estate or inheritance taxes with lower thresholds. Example: Washington State’s exclusion amount increases to $3,000,000 for decedents dying July 1–December 31, 2025, with rates ranging from 10% to 35%.
– Check your state’s filing rules and deadlines.

Important reminders
– If you use the medical expense election to claim unpaid medical bills on the final Form 1040, you must not also claim those amounts on the estate tax return.
– Keep copies of all statements and calculations for both returns.

Disqualifying Factors That Commonly Trip Up Families

• Claiming the same medical expenses on both the final return and the estate tax return.
• Missing the one-year window for paying unpaid medical bills when planning to use the election.
• Trying to carry a decedent’s net operating loss or capital loss to the estate’s own income tax filings; those losses end with the decedent if not used on the final return.
• Forgetting to attach the election statement to the final Form 1040.
• Itemizing when the standard deduction would produce a lower tax bill, or taking the standard deduction when itemizing would save more due to large medical expenses.

Alternatives If You Don’t Qualify

• If the decedent didn’t pay medical expenses before death and the estate will not pay within one year, treat those as estate liabilities and, if you file one, deduct them on Form 706.
• If medical expenses do not exceed 7.5% of AGI, itemizing may not help. Consider whether the standard deduction is better on the final Form 1040.
• If the decedent’s losses can’t be used due to limits, accept that they expire. Look for other savings, such as timing other deductible costs within the final return period (when allowed).
• If the estate is not required to file Form 706, the medical expense election may still produce income tax savings on the final return. Run both sets of numbers.

How to Improve Your Chances of a Better Tax Outcome

• Keep meticulous records
  • Maintain a folder with all medical bills, dates paid, proof of payment, and who received care (decedent, spouse, dependent).
• Test both paths for unpaid medical expenses
  • Compare results if you elect to deduct them on the final Form 1040 versus leaving them on the estate tax return. Choose the path that saves more overall.
• Use losses before they vanish
  • Make sure any decedent net operating loss or capital loss carryover is applied on the final Form 1040. Losses not used there cannot be claimed by the estate.
• Do the AGI math early
  • Calculate the 7.5% of AGI threshold for the final return as soon as you can to decide whether itemizing medical expenses is worthwhile.
• Document credits
  • Keep proof for credits like the Earned Income Credit and Child Tax Credit. Credits still apply even when the final tax year is shorter than 12 months.

Step-by-Step Filing Roadmap for Executors

1. Confirm your legal role
   • Make sure you’re the executor or personal representative with authority to file the decedent’s final Form 1040 and the estate tax return if required.
2. Gather documents
   • Tax records, W-2s, 1099s, SSA-1099 if applicable, brokerage statements, medical bills, proof of payments, and any unpaid balances.
3. Identify medical expenses paid before death
   • List each item, date, amount, and the person treated. Total them and compare to 7.5% of AGI.
4. List unpaid medical expenses at death
   • Track when the estate pays each bill. If paid within one year of death, decide whether to elect to treat them as paid by the decedent.
5. Make the election, if beneficial
   • If you choose to elect, attach a statement to the final Form 1040 that:
     • Identifies each expense,
     • States it was paid by the estate within one year of death,
     • States you elect to treat it as paid by the decedent when incurred,
     • States the total amount covered by the election.
6. Check for losses
   • Apply any decedent net operating loss or capital loss carryovers on the final Form 1040. Do not try to carry them to the estate’s income tax filings.
7. Review credits
   • Claim credits that applied before death. The short year does not prevent these.
8. File returns
   • File the final Form 1040: https://www.irs.gov/forms-pubs/about-form-1040.
   • If required, file Form 706: https://www.irs.gov/forms-pubs/about-form-706.
9. Keep records
   • Store all returns, schedules, election statements, receipts, and worksheets with the estate file.

Detailed Examples That Mirror Real Cases

Example 1: Medical expenses paid before death and itemizing pays off
– Facts: Decedent’s AGI = $100,000. Qualified medical expenses paid before death = $15,000.
– Analysis: 7.5% threshold = $7,500. Deductible amount = $7,500 ($15,000 − $7,500).
– Outcome: Executor itemizes on the final Form 1040 and claims the $7,500 medical deduction. Itemizing beats the standard deduction here.

Example 2: Unpaid bills at death; one-year election saves more than the estate deduction
– Facts: Decedent died with $40,000 of unpaid hospital bills. Estate pays them six months after death. Estate is far below the federal exemption.
– Choice: Deduct on Form 706 or elect to treat as paid by the decedent and claim on the final Form 1040 (subject to 7.5% of AGI).
– Outcome: Executor elects to claim expenses on the final Form 1040, where the deduction produces a clear income tax saving. Election statement attached; no double counting on Form 706.

Example 3: Losses expire if not used on the final return
– Facts: Decedent had a prior-year NOL and a $10,000 capital loss carryover. Little or no income appears in the final return period.
– Result: After using what the final return can absorb, the remainder cannot be moved to the estate’s income tax return. The unused portion expires.
– Takeaway: Executors should not assume losses carry to the estate. Plan early to use them on the final Form 1040.

Key Limits, Deadlines, and What They Mean for You

• Medical expense threshold: 7.5% of AGI — only amounts above this margin are deductible on the final return when itemizing.
• One-year payment window for the election — estate must pay unpaid medical bills within one year after death to shift them onto the final Form 1040.
• Federal estate tax exemption for 2025: $13.99 million per person — estates under this amount often skip filing Form 706, except where portability or other reasons apply.
• Washington State example for 2025: Exclusion amount $3,000,000 (July 1–December 31, 2025), with 10%–35% rates. State rules vary; check your state’s department of revenue.

Common Questions From Families

• If I take the standard deduction on the final Form 1040, can I still elect to move unpaid medical expenses from the estate to the final return?
  • Yes, you can make the election. But if you’re not itemizing, those medical expenses won’t reduce tax on the final return. In that case, leaving them on the estate tax return may help more if the estate files Form 706.
• Do I need to wait for all final medical bills before filing the final Form 1040?
  • If you plan to use the election for unpaid bills the estate will pay within a year, you need accurate totals. Build in time to gather final statements so the election statement is complete.
• Can I split some unpaid medical bills between the final Form 1040 and Form 706?
  • Yes. The executor may elect to treat all or part of the expenses as paid by the decedent. Avoid double deduction and document exactly which amounts go where.

Documentation That Protects Your Filing

• Detailed ledger of medical expenses:
  • Paid before death: date paid, amount, provider, who received care.
  • Unpaid at death: date incurred, date the estate paid, amount, provider.
• Election statement attached to the final Form 1040:
  • List amounts covered by the election and dates the estate paid them.
• Proof of losses:
  • Prior-year returns showing a net operating loss or capital loss carryover and supporting schedules.
• Credit support:
  • Records showing eligibility for credits (EIC, Child Tax Credit, and others).

Neutral Policy Context for 2025

• Federal rules for medical expense deductions for decedents and estates are unchanged for 2025, including the 7.5% of AGI threshold.
• The federal estate tax exemption remains high at $13.99 million per person, influencing whether an estate tax return is required.
• States differ. Executors should check their state’s current estate or inheritance tax rules and deadlines to avoid missed savings or penalties.

Bottom-Line Decision Framework You Can Apply Today

• Step 1: Decide whether to itemize on the final Form 1040. If medical expenses paid before death push you over 7.5% of AGI, itemizing often pays.
• Step 2: For unpaid medical bills, confirm if the estate will pay them within one year after death. If so, model the numbers both ways—on the final Form 1040 (with the election) versus on Form 706.
• Step 3: Apply the decedent’s net operating loss and any capital loss carryovers on the final Form 1040. None of these losses go to the estate’s income tax return.
• Step 4: Claim credits that applied before death. A short final year does not block them.
• Step 5: File the right forms on time, attach the election statement if you use it, and keep a complete record set.

With clear records, smart modeling, and careful use of the one-year election, most families can decide whether a medical expense belongs on the final Form 1040 or the estate tax return and make full use of any decedent losses. If you’re unsure about any step, review IRS guidance in Publication 559 and Publication 502, and consider professional advice to protect the estate and the family’s tax position.