Individual taxpayers cannot deduct funeral expenses on their tax returns. The IRS allows deductions for medical expenses to prevent or treat a medical illness or condition but not funeral or cremation costs. Alternatively, tax deductions do exist for the estate of a deceased individual. Let’s look at the question, “Are funeral expenses tax-deductible?” in-depth and see how to save on funeral costs in today’s economy.
Are Funeral and Cremation Expenses Tax Deductible?
Tax attorneys or other preparers may help walk you through the specifics of your particular situation. However, as a living individual, the IRS does not allow you to deduct funeral expenses from your taxes.
However, after you pass away, your estate may owe taxes. In North Carolina, your estate will not owe any estate taxes to our state. The only North Carolina residents who will owe estate taxes will owe the federal government, and only if their estate is worth more than $12.06 million.
Finding Tax Deductions for Your Estate
If your estate in NC will be worth more than $12.06 million after you pass away, you may want to look for tax deductions for your estate. Funeral expenses paid by your estate, including cremation, may be tax-deductible.
These expenses may include:
- Professional services of a funeral home and funeral director
- Cremation fees
- Placement of the cremains in a cremation urn or cremation burial plot
- Burial plots and vaults
- Minister or other officiant costs
- Transportation expenses for the decedent
- Transportation expenses for the immediate family to service
- Catered food at the receptions or services
If your family does not know your plan to pay for the funeral expenses from your estate, your estate will not get any tax deductions. Any family members’ out-of-pocket expenses for your funeral will not receive tax deductions. An individual who pays funeral expenses does not receive tax deductions. Only the estate of the deceased receives tax deductions for funeral expenses.
Statistical Facts Show You Can Benefit From Inflation
According to the National Funeral Directors Association, in 2021, the cost of a funeral was $7,848. The cost of a funeral with cremation was $6,971. Funerals are crucial for a family that needs to grieve together. Just like weddings and graduations, funerals mark a profound change to a family that needs time together to overcome and move forward with hope.
According to the Bureau of Labor Statistics, between 1986 and 2017, the price of funerals in the United States rose 227.1%. Funeral expenses costing $2,200 in 1986 cost $7,678 in 2021. This inflation principle means that buying something 30 years ago and using it 30 years later costs much less than buying it now.
Lock in Today’s Prices for Tomorrow’s Costs
When you buy a funeral trust, you lock in today’s prices to cover tomorrow’s costs. For example, let’s say your father, at age 45 in 1986, purchased a funeral trust in North Carolina for $2,200. His prepaid funeral plan included everything he would need for a funeral and burial, including:
- Burial with Viewing & Funeral
- Professional Services
- Transfer of Deceased to the Funeral Home
- Care and Preparation (with embalming)
- Visitation and Funeral (same day)
- Basic Metal Casket
- Graveside Service
When he unexpectedly passed away in 2021, his last will and testament stated that a local funeral home held a funeral trust for his arrangements. He paid $2,200 in 1986 for services worth $7,678 in 2021.
His foresight saved your family money that was worth more than mere tax deductions. But how did he know to make a preplan? He simply planned on the certainty of inflation. Your family reaped benefits from his preparation to the tune of $5,478.
Is a Funeral Trust the Same as a Preplan or Prearrangement?
Not all preplans and prearrangements are funded. However, a funeral trust is funded. You will also have to determine if you wish the trust to be revocable or irrevocable. These options have different legal and tax consequences and they vary by state. You may transfer a funeral trust to a different funeral home if you move. In other words, it is “portable”. The account itself is not established in the name of the funeral home, it is established in the name of the proposed future decedent. Funeral Homes are not allowed to hold preneed funds, they are only the beneficiaries of the funds. In NC, a preneed trust contract is filed with the Board of Funeral Service but funds are protected within a bank or insurance account.
The trust is a legal agreement that your chosen funeral home will use your trust assets for your future funeral needs. This arrangement is beneficial for you and your loved ones because you save money in the long run. However, there are other essential benefits to setting up a preneed plan, preplan, or funeral trust.
A paid preneed contract with a funeral home gives you the time to decide about burial or cremation services and types of memorial or funeral services. A preneed contract also lets you consider how you want others to remember you – with flowers, charities you loved, music, bulletins, obituaries, and speakers.
Making these kinds of decisions now gives your family time to rest and grieve your loss instead of making harried decisions. They are not left wondering if you would have approved of their decisions for your services.
Another Way to Save with a Preplan: Qualify for Medicaid
Putting money into a funeral trust allows you to “spend down” excess assets to qualify for Medicaid care without violating the look-back period. Many seniors open trusts before the 5-year look-back period so that Medicaid does not count them as assets (for penalties or ineligibility).
However, North Carolina does not count the expense of an irrevocable funeral trust against you during the 5-year look-back period. You can spend down your assets on a funeral trust and still qualify for Medicaid benefits. Medicaid benefits may cover home care, nursing care, or long-term care.
During the 5-year look-back period, assets used to purchase an irrevocable burial contract are an allowable transfer when:
- Purchased for your benefit, or the benefit of your spouse, your child under the age of 21, or your blind or disabled child of any age
- The contract lists each burial item and/or service, including many necessary services.
Creating a trust with a funeral home in your area can help you spend down assets and qualify for Medicaid while giving your family peace of mind about your future plans.
We Can Help
At Renaissance Funeral Home, we create beautiful, memorable events for your future needs or loved ones’ arrangements. Our appreciation for the many different cultural and religious beliefs helps us respect your traditions and background. We offer services for every budget level, including cremations, green burials, traditional burials, and cremations with burial. To see how you can benefit from making a pre-plan preneed funeral trust contract, talk with us and learn more about how you can benefit your bottom line and your family’s future. Contact us today to get started on your plans.