Estate taxes are not deductible on your personal income tax return, with one narrow exception. If you inherited income that the deceased person earned but never collected — such as a final paycheck, an unpaid bonus, a traditional IRA distribution, or accrued bond interest — you can deduct the portion of federal estate tax attributable to that income when you report it. Everything else works differently: the deductions that shrink an estate’s tax bill (funeral costs, debts, administrative expenses, state death taxes) happen on the estate’s own return, Form 706, before anything reaches you. So the short answer to whether estate taxes are deductible on your income tax return is almost always no, and understanding the one place the answer flips to yes is where real money is at stake.
Why Estate Taxes Aren’t a Personal Deduction
The IRS does not treat federal estate tax as a personal expense of the beneficiary. It’s a tax on the estate, paid by the estate, before assets are distributed. By the time property reaches you, the tax has been settled and there is nothing left for you to deduct on your Form 1040.
You might expect estate taxes to fold into the state and local tax (SALT) deduction. They don’t. SALT covers income, property, and sales taxes, and estate or inheritance taxes fall outside those categories. The 2026 SALT deduction is capped at $40,400 in any case.1Internal Revenue Service. Instructions for Schedule A (Form 1040) State income tax rules generally follow the same pattern: beneficiaries cannot deduct estate or inheritance taxes against their state taxable income either.
The One Exception: Estate Tax Paid on Income in Respect of a Decedent
When someone dies, they sometimes leave behind income they had earned but never received. Tax professionals call this “income in respect of a decedent,” or IRD. Common examples include a final paycheck, an unpaid commission or bonus, distributions from a traditional IRA or 401(k), and accrued interest on savings bonds. Because the decedent never paid income tax on these amounts, whoever receives them owes income tax on the full amount.
Here is where a large estate creates a double tax problem. The same IRD was included in the gross estate and taxed at up to 40%. The beneficiary then pays income tax on the same dollars at rates up to 37%. Without relief, the combined bite could consume more than half the money. Section 691(c) of the Internal Revenue Code exists to prevent that result.2Office of the Law Revision Counsel. 26 USC 691 – Recipients of Income in Respect of Decedents
The rule is proportional. When you report IRD on your income tax return, you can deduct the portion of federal estate tax attributable to that income. The calculation compares the estate tax actually paid against what the tax would have been if the IRD had been excluded from the estate. The difference is the deductible amount, and it’s spread across whoever received the IRD.3eCFR. 26 CFR 1.691(c)-1 – Deduction for Estate Tax Attributable to Income in Respect of a Decedent If an estate contained $500,000 in IRD and the estate tax attributable to that $500,000 was $200,000, the total Section 691(c) deduction is $200,000.
One threshold matters: this deduction only helps if the estate actually paid federal estate tax. In 2026, the basic exclusion amount is $15,000,000 per person, so estates below that threshold don’t owe federal estate tax and Section 691(c) has nothing to work with.4Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 You still owe income tax on the IRD; there is just no estate tax to offset.
How to Claim the IRD Deduction on Your Return
Individuals claim the Section 691(c) deduction as an itemized deduction on Line 16 of Schedule A (Form 1040). The IRS instructions specifically direct taxpayers not to include this amount on the “Other Taxes” line and to report it on Line 16 as an “other itemized deduction.”1Internal Revenue Service. Instructions for Schedule A (Form 1040)
A helpful detail: this deduction is not subject to the 2% adjusted gross income floor that limits many other miscellaneous itemized deductions. Section 67(b) of the Internal Revenue Code specifically exempts the Section 691(c) deduction from that restriction.5Office of the Law Revision Counsel. 26 USC 67 – 2-Percent Floor on Miscellaneous Itemized Deductions You deduct the full proportional amount dollar for dollar against your income.
The catch is that this only helps if you itemize. Take the standard deduction and you lose the benefit entirely. For beneficiaries receiving substantial IRD, running the numbers both ways is worth the trouble.
When IRD Flows Through an Estate or Trust
If the estate or trust collects the IRD and then distributes it to beneficiaries, the Section 691(c) deduction flows through proportionally. Your share of the deduction appears in Box 10 of Schedule K-1 (Form 1041), and you claim it on your own return.6Internal Revenue Service. Instructions for Form 1041 and Schedules A, B, G, J, and K-1 Estates and trusts that keep the IRD claim the deduction themselves on Line 19 of Form 1041.7Internal Revenue Service. Publication 559 – Survivors, Executors, and Administrators
This is where beneficiaries commonly lose money. If you inherit a traditional IRA from someone whose estate paid federal estate tax and you don’t claim the Section 691(c) deduction when you take distributions, you are voluntarily paying tax twice on the same dollars. Check any K-1 you receive for a Box 10 entry, and if you’re taking distributions from an inherited retirement account, ask the executor whether the estate filed Form 706 and paid federal estate tax.
The Deductions That Actually Reduce Estate Tax Happen on Form 706
Before the estate tax is calculated, the executor can subtract a range of items from the gross estate on Form 706. None of these appear on any beneficiary’s personal income tax return. They reduce the taxable estate itself, which lowers the tax bill for everyone who inherits.
Section 2053 of the Internal Revenue Code allows deductions for the reasonable costs of settling the estate: executor commissions, attorney fees, accountant fees, appraiser fees, court costs, and the cost of maintaining estate property until distribution.8Office of the Law Revision Counsel. 26 USC 2053 – Expenses, Indebtedness, and Taxes9eCFR. 26 CFR 20.2053-3 – Deduction for Expenses of Administering Estate The same section allows deductions for the decedent’s outstanding debts, unpaid mortgages, and legitimate claims against the estate, generally limited to amounts actually paid. Reasonable funeral and burial costs — including a tombstone, monument, burial lot, future care of the lot, and transportation of the body — are deductible if allowable under local law and paid by the estate.10eCFR. 26 CFR 20.2053-2 – Deduction for Funeral Expenses Section 2058 permits a deduction for state estate, inheritance, or succession taxes paid.11Office of the Law Revision Counsel. 26 USC 2058 – State Death Taxes
If you’re a beneficiary wondering whether any of this affects your 1040, it doesn’t. These deductions are the executor’s job, and their benefit reaches you indirectly through a smaller estate tax bill, not through anything you enter on Schedule A.
What Most Heirs Actually Benefit From: Stepped-Up Basis
For the vast majority of families who inherit property, the meaningful tax benefit isn’t a deduction at all. Under Section 1014 of the Internal Revenue Code, property acquired from a decedent gets a new tax basis equal to its fair market value on the date of death.12Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired from a Decedent This “stepped-up basis” wipes out capital gains that accumulated during the decedent’s lifetime.
If your parent bought a house for $150,000 thirty years ago and it’s worth $600,000 at death, a sale the day before death would have produced a $450,000 taxable gain. Because you inherited the property instead, your basis resets to $600,000. Sell it the next week for $600,000 and your capital gain is zero.13Internal Revenue Service. Gifts and Inheritances The same rule applies to stocks, real estate, and most other inherited assets. Stepped-up basis is available whether or not the estate filed Form 706 or owed any estate tax, so heirs of modest estates get the same treatment as heirs of large ones.
The one category of inherited assets that does not get a stepped-up basis is IRD, which is precisely why Section 691(c) exists as a separate relief mechanism. If you inherited a traditional IRA, its basis was not stepped up, and distributions are fully taxable to you as ordinary income. That is the situation where the estate tax deduction on your income tax return finally comes into play — and where forgetting it costs real money.