Assume, for this question only, that Kenny and Melissa were married today. They

Question

Assume, for this question only, that Kenny and Melissa were married today. They went straight to Kenny’s lawyer’s office to execute new wills and a QDOT trust document. On the way home from executing a valid will leaving all assets to Melissa, Kenny and Melissa were in a serious car accident. Kenny was comatose for several days before dying. His unpaid medical expenses were $150,000; Melissa had medical expenses for the accident of $10,000. The day after Kenny died, Melissa gave Kenny’s three children and three grandchildren each $22,000 then left for France to stay with her mother. Prior to Kenny’s death, Kenny and Melissa gave Kenny’s mother $60,000. How much would be potentially deductible on Kenny’s estate tax or income tax return for the unpaid medical expenses absent AGI limits?

A) Estate Tax (706) $150,000; Income Tax (1040) $160,000

B) Estate Tax (706) $160,000; Income Tax (1040) $0

C) Estate Tax (706) $0; Income Tax (1040) $10,000

D) Estate Tax (706) $150,000; Income Tax (1040) $0

Explanation / Answer

As per IRS, medical expenses are deductible from income tax return in the year in which they are actually paid. However, in case of death of the person before paying the medical expenses, the surviving spouse can file the final joint return for that year and can claim such deduction from income tax but the same are required to be paid within one year of the date of death of the person. Or in the second option, the decendent of the person can claim such unpaid medical expenses to be liability in estate tax return and therefore, can save the higher estate tax of 40%.

In the given case, Kenny cannot take deduction of unpaid medical expense of $150,000 from income tax return as the same is not mentioned to be paid by her within next one year. Instead she can take such unpaid bills as liability in estate tax return and can save estate tax on net wealth.

Correct answer is D. Estate Tax $150,000; Income Tax $0

NOTE: In the given case, it is assumed that medical expense of Kenny amounting to $10,000 are paid medical expenses and the same will be taken as deduction in her income tax return (1040). Moreover, question itself asks for the potential deduction of unpaid medical expenses only.

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