Legal Definitions - deduction in respect of a decedent

A deduction in respect of a decedent refers to specific expenses or income items that a person was entitled to or obligated to pay before their death, but which were not actually paid or received until after their death. When these items are eventually paid by the deceased person's estate or received by their beneficiaries, they can sometimes be claimed as a deduction for income tax purposes.

The purpose of this deduction is to prevent certain income or expenses from being taxed twice – once as part of the deceased's estate for estate tax purposes, and again as income to the beneficiaries or the estate for income tax purposes. It ensures that the tax treatment of these items is consistent with how they would have been treated if the person had lived.

Here are some examples illustrating this concept:

• Unpaid Medical Expenses: Imagine a person, Mr. Henderson, who incurred substantial medical bills in the weeks leading up to his passing. He died before these bills were paid. After his death, his estate receives the invoices and pays them. If Mr. Henderson had paid these bills while alive, they would have been deductible on his personal income tax return. Because his estate paid them after his death, the estate can claim these medical expenses as a deduction in respect of a decedent on the estate's income tax return, even though they were also a liability that reduced the value of his estate for estate tax purposes. This prevents the expenses from being effectively "taxed" twice.
• Unpaid Business Expenses: Consider Ms. Chen, a self-employed graphic designer who passed away unexpectedly. Before her death, she had purchased new design software and paid for a professional photography subscription for her business, but the invoices for these items arrived and were paid by her estate a month after she died. Had Ms. Chen paid these while alive, they would have been legitimate business deductions on her Schedule C (Profit or Loss From Business) for income tax purposes. Her estate can claim these as a deduction in respect of a decedent on the estate's income tax return, reducing the taxable income generated by her business before it was fully wound down.
• State Income Tax Paid After Death: Suppose Mr. Davies died in February. In April, his estate's executor filed his final state income tax return for the previous year and paid the state income tax that was due. If Mr. Davies had paid this state income tax while he was alive, it would have been deductible on his federal income tax return. Since the payment occurred after his death, his estate can claim this state income tax payment as a deduction in respect of a decedent on the estate's federal income tax return, preventing this expense from being treated unfavorably due to the timing of his death.