Estate Expenses: Form 706 or Form 1041? The 642(g) Election 2026

The rule: one cost, one return

Two returns can use the same expense. Form 706 uses it to lower the taxable estate; Form 1041 uses it to lower the estate’s income. Section 642(g) lets the executor pick, and only one. The first sentence of the statute says amounts allowable under section 2053 or 2054 “shall not be allowed as a deduction (or as an offset against the sales price of property in determining gain or loss) in computing the taxable income of the estate,” unless a statement and a waiver are filed. The statement says the items “have not been allowed as deductions” for estate tax and waives the right to have them allowed “at any time.”

The regulation fills in the mechanics.

• A statement in duplicate (26 CFR 1.642(g)-1), filed with the income tax return or “at any time before the expiration of the statutory period of limitation applicable to the taxable year for which the deduction is sought.” Publication 559 says the same.
• Provisional claims are allowed. A deduction on the estate’s income tax is not precluded by claiming it on the estate tax return “so long as the estate tax deduction is not finally allowed and the statement is filed.”
• The waiver is final. After the statement, “the item cannot thereafter be allowed as a deduction for estate tax purposes.”
• You may split. Regulation 1.642(g)-2: “One deduction or portion of a deduction may be allowed for income tax purposes if the appropriate statement is filed, while another deduction or portion is allowed for estate tax purposes.”
• Debts of the decedent are outside the rule. Taxes, interest and business expenses accrued at death are allowed on both returns, because section 642(g) “has no application” to them (regulation 1.642(g)-2). The same sentence of the statute exempts income in respect of a decedent: our final return guide covers the separate section 691(c) deduction.

The Form 1041 instructions we read never name section 642(g); our search of the 2025 text found only the echo in the fee tip. The 642(g) statement is not a line on the form, which is why it is skipped. Whether an estate that files no Form 706 at all must attach one is a question the sources we read do not answer, so it goes to the preparer (our reading).

Where each cost can go

The table follows each cost to both returns. Form 706 means Schedule J or K (Instructions for Form 706, Rev. July 2026) under section 2053 and regulation 20.2053-3; Form 1041 means the lines and the section 67(e) test in regulation 1.67-4.

Read the table from the bottom up for a planning rule. Funeral costs, costs allocable to tax-exempt income, ownership costs of a vacant house and investment advice get no ordinary deduction on Form 1041. If the estate is above the line, those are the candidates for the Form 706 side, because the income tax will not take them (our reading of the table).

What a Form 706 deduction is worth in 2026

Below the exclusion, nothing. A decedent’s estate owes no federal estate tax until the taxable estate plus adjusted taxable gifts passes the $15,000,000 basic exclusion amount (Rev. Proc. 2025-32, section 2.14; our reading of the credit; our estate tax exemption guide has the arithmetic). The Form 706 instructions require a return when the gross estate, adjusted taxable gifts and specific exemption exceed $15,000,000, or when the executor elects portability; our Form 706 guide covers the filing test.

Above it, the marginal rate is 40% (26 U.S.C. 2001(c): “$345,800, plus 40 percent of the excess of such amount over $1,000,000”). On Form 1041 the highest rate is 37%, from $16,000 of taxable income (Table 5). Looking only at the two rates, 40% beats 37%. The comparison that matters is the amount of expense that sits above the line.

The table keeps $160,000 of costs constant and moves the size of the estate (our arithmetic; no adjusted taxable gifts, no deceased spousal unused exclusion, no other deductions).

Above the line, each dollar of expense on Form 706 is worth 40 cents; below it, it is worth nothing. The “ceiling” in the last column assumes the estate or its beneficiaries have enough income to use the costs at the top rate; the next case shows what the Form 1041 side actually delivers.

Case 1: an estate under the line, closing in one year (our arithmetic)

The estate is $6,000,000, so Form 706 is worth $0. In its last year it has $50,000 of income (net rent $30,000 and interest $20,000). It paid $160,000 of costs: legal $90,000, fiduciary commission $50,000, appraisals and accounting $20,000. We treat all of them as section 67(e) costs. Two children share the residue equally and each has a 32% marginal rate (our assumption).

Two conditions hide in that $35,200. The deduction is usable only in the child’s tax year in which or with which the estate ends, and any part the child cannot absorb that year is lost: the Form 1041 instructions say a beneficiary who lacks the income “can’t carry the balance over to any succeeding year.” And the $50,000 commission is income to the executor: if the executor is one of the children, at 32% that is $16,000 of tax on the person who took the fee, which belongs on the same page as the deduction (our arithmetic; see our executor and trustee fees by state for how fees are set).

The character of each deduction is carried through. Regulation 1.642(h)-2(b)(1): each deduction “retains, in the hands of the beneficiary, its character”. Section 67(e) costs go to Schedule 1 as an adjustment to income (code A); non-miscellaneous itemized deductions need the beneficiary to itemize (code B); miscellaneous itemized deductions no longer exist (section 67(h)).

Case 2: an estate just over the line, split the costs (our arithmetic)

The taxable estate before the costs is $15,120,000, which is $120,000 over the exclusion. With no deduction the estate tax is 40% of $120,000, or $48,000. Putting all $160,000 on Form 706 brings the taxable estate to $14,960,000 and the tax to $0, so the first $120,000 did the work and the last $40,000 saved nothing.

Regulation 1.642(g)-2 allows the split. The executor claims $120,000 on Form 706 and files the 642(g) statement for the other $40,000. If the estate has income above $16,000 in the year, the $40,000 comes off income taxed at 37%, worth $14,800. The two together are $62,800, against $48,000 with everything on Form 706 (our arithmetic; the result changes if the estate has little income, since the unused part then travels under 642(h)).

A caution on the choice of items. The $120,000 that goes on Form 706 should be amounts the estate tax will allow: the Form 706 instructions say commissions must be paid or expected to be paid, and attorney fees may not exceed a reasonable payment for the services (Schedule J).

Case 3: the house is sold, and the costs of sale (our arithmetic)

An estate sells a house five months after death. The date-of-death value and basis were $1,000,000; the price is $1,030,000; the broker’s 6% commission is $61,800 and other seller costs are $8,200, $70,000 in all. The estate is under the exclusion, so there is no Form 706 deduction.

Publication 544 subtracts selling expenses from the amount realized: $1,030,000 minus $70,000 is $960,000, against a basis of $1,000,000. The sale produces a $40,000 capital loss, not a gain, even though the price was above the appraisal. Property acquired from a decedent is treated as held for more than one year (Instructions for Schedule D (Form 1041)), so the loss is long-term. For the step-up that fixes the basis, see our step-up in basis guide.

What the estate can do with the loss:

• Against other gains in the same year, in full. Otherwise only $3,000 a year against other income (26 U.S.C. 1211(b); the Schedule D instructions use the same figure for an estate).
• The net loss stays with the estate. The Schedule D (Form 1041) instructions say that if losses exceed gains “the net loss must be allocated to the estate or trust and not to the beneficiaries.”
• At termination, the unused loss passes to the beneficiaries as a capital loss carryover (642(h)(1); box 11, codes C and D), used against their gains and then $3,000 a year (regulation 1.642(h)-1).

Its value is small unless gains exist to absorb it. At the 37% rate, $3,000 a year is worth $1,110 a year; fully absorbed by gains taxed at 20% plus the 3.8% net investment income tax, $40,000 is worth at most $9,520 (our arithmetic, upper bound).

The alternative exists only for an estate above the line, and only if the sale was necessary to pay debts, expenses or taxes, or to preserve the estate or carry out distribution (regulation 20.2053-3(d)(2)). Then, if the estate is at least $70,000 over the line, the $70,000 can go on Form 706 and, at 40%, saves up to $28,000. The price of that choice is the statute’s: the costs can no longer offset the sales price, so the estate reports a $30,000 gain instead of a $40,000 loss. Taxed at 20% plus 3.8%, that is at most $7,140 (our arithmetic, upper bound), leaving a net advantage of up to $20,860 for the Form 706 side. A taxable estate can see that trade; an estate under $15,000,000 cannot.

Where an unused deduction goes: section 642(h)

When the estate ends, three things can be left over. The table sets out each one.

Who is a “beneficiary succeeding to the property”? Regulation 1.642(h)-3(c): “the residuary beneficiaries (including a residuary trust), and not specific legatees or devisees, pecuniary legatees, or other nonresiduary beneficiaries.” A child who receives the house by a specific devise does not get the deduction; the sibling who takes the residue does. That is a reason to read the will before closing the books, since the person who bears the cost of administration and the person who receives its deduction can differ (our reading).

Timing matters because there is no carryover of the excess. An estate that pays $160,000 of costs in a year with $50,000 of income and does not end that year has an operating loss of about $110,000 (our arithmetic), which carries forward and may be absorbed later, with the 80% cap on an NOL deduction. If the same costs fall in the year the estate ends, they become excess deductions: fully above the line for the beneficiary, usable once. Regulation 1.641(b)-3(a) says administration “cannot be unduly prolonged,” so the choice has limits: if the estate is unreasonably prolonged, it is treated as terminated after a reasonable period (our reading of how the two rules fit).

The 65-day election and the year-end

Section 663(b) lets an estate treat an amount paid or credited to a beneficiary within the first 65 days of the next year as paid on the last day of the earlier year. The Form 1041 instructions (Question 6) say the executor of a decedent’s estate can make it, by checking the box on a timely return, and that “Once made, the election is irrevocable” (regulation 1.663(b)-2(a)(1)). For a calendar-year estate, the 65th day of 2027 is March 6, 2027 (31 days in January, 28 in February, 6 in March; our arithmetic), and the 2026 Form 1041 is due April 15, 2027 on the same rule the 2025 instructions give for 2026.

The election moves distributions between years. It does not move costs: it matters for this page only because the same year-end decides where income and costs meet. Our trust and estate brackets page shows what keeping income versus paying it out costs at the 2026 rates, and the neighbouring page on executor personal liability covers the clocks that run before an estate is distributed.

What the 2025 forms still say

• Miscellaneous itemized deductions. The 2025 Instructions for Form 1041 (box 11, code B) say section 67(g) suspends them “for tax years 2018 through 2025.” The statute now reads that no miscellaneous itemized deduction is allowed “for any taxable year beginning after December 31, 2017” (26 U.S.C. 67(h), as amended by Public Law 119-21). Excess deductions of that kind are therefore not available to beneficiaries in 2026 either (our reading of 67(h) and the instruction).
• Section 67(e) costs are different. They are “not itemized deductions” and “not disallowed under section 67(g)” (regulation 1.67-4(a)(1)(ii)), which is why the executor’s commission and the legal bills of administration still deduct on Form 1041.
• The 2026 forms are not out. The latest Instructions for Form 1041 and Publication 559 are the 2025 editions; the Form 706 instructions are the July 2026 revision. The 2027 inflation figures for brackets and the exclusion have not been published as of this date.

What a reader can do with this

None of this is advice; these are the questions the sources put on the table.

• Find the line. Is the taxable estate above or below $15,000,000 for a 2026 death? Below it, Form 706 may still be filed for portability, but the cost deduction there is worth $0 in tax. Our Form 706 guide and estate tax exemption guide cover the test; our list of states with an estate or inheritance tax covers the part this page does not.
• Make a cost list before the first payment. Sort each cost into the table above: both returns, Form 706 only, or Form 1041 only. Appraisals and accounting for a Form 1041 are on both sides; funeral expenses are not.
• Plan the last year. Costs paid in the year the estate ends become excess deductions for the residuary beneficiaries; costs paid earlier may become a net operating loss. Check who the residuary beneficiary is under the will before choosing the year.
• Count the sale costs. If a house will be sold by the estate, a commission is either an offset to the price (an income tax loss that may be hard to use) or, for a taxable estate and a necessary sale, a Form 706 deduction. See our probate for real estate guide for the cost side.
• Ask for the 642(g) statement in writing. If any cost goes on Form 1041 while a Form 706 is filed, the statement lists the items and waives the right to the estate tax deduction; ask the preparer when it will be filed.

Who decides

Which return takes which cost, whether to split, when to close the estate and who bears the tax on the executor’s fee are decisions for the estate’s attorney and the CPA who prepares Forms 706 and 1041. An adviser who looks at the whole picture can help line up the size of the estate, the sale of the real estate and the beneficiaries’ brackets before the first large bill is paid.

FAQ

Sources, read and saved on October 30, 2026: 26 U.S.C. 67, 172, 642, 663, 1211 and 2001 (Legal Information Institute, Cornell Law School); 26 CFR 1.641(b)-3, 1.642(g)-1, 1.642(g)-2, 1.642(h)-1, 1.642(h)-2, 1.642(h)-3, 1.663(b)-2, 1.67-4 and 20.2053-3; Rev. Proc. 2025-32 (sections 2.14, 4.01 Table 5 and 4.03); IRS Publication 559 (2025), Survivors, Executors, and Administrators; IRS Publication 544 (2025); Instructions for Form 1041 and Schedule D (Form 1041) (2025); Instructions for Form 706 (Rev. July 2026). Worked cases, dates and ratios are arithmetic on those sources and are labelled as such. This is analysis of public documents, not investment, legal or tax advice.