How to Avoid Taxes on Executor Fees
What Is an Executor Fee?
If you were named as the executor of an estate, then the chances are good that your primary responsibility will be to take care of all the necessary paperwork and pay off any debts or taxes associated with it. Depending on where you live and how large the estate is, this could mean many hours of work – and a few dollars in fees for your efforts. An executor fee is a sum of money paid to the executor of an estate by the estate’s beneficiaries. It is also sometimes known as an executor commission, administration charge, or probate fee. These fees are not taxable unless they exceed the estimated value of your time spent on the job.
What Are the Executor Fees in the USA?
Executor fees in the United States vary from state to state, with different laws governing how much the executor of an estate can charge. In most cases, the fee is calculated as a percentage of the total value of the estate’s assets – and it can range anywhere from 5% to 15%. This means that if your client dies without debts, their beneficiaries will have to pay a negligible sum. For instance, in California, the executor can charge up to 10% of the value of the estate, while in Texas the maximum fee is capped at 5%. However, if the estate is large enough that it requires a lawyer or accountant, then these professionals can charge their own fees on top of your own.
How to Avoid Taxes on Executor Fees
Here are a few tips for avoiding taxes on executor fees:
- Keep your fee within reason.
As mentioned above, executor fees are not taxable unless they exceed the estimated value of your time spent on the job. This means that you can charge a reasonable fee without worrying about being taxed on it. However, it is important that you stay within your budget by taking into account the time and energy that this job will take. If you are struggling to find a figure that is reasonable, consider asking other members of the family for input on how much they think you should charge.
- Keep good records.
It is important to keep good records of all the work that you do as executor. This way, if you are audited by the Internal Revenue Services (IRS), you can prove that the fees you charged were fair and equitable.
- Claim your expenses.
As executor, you will likely incur a number of expenses related to the job. These could include postage, phone calls, legal fees, and accounting costs. You can claim these expenses as deductions on your taxes, which will help to offset the amount you have to pay in taxes on your executor fee.
- Ask the beneficiaries to pay upfront.
If possible, ask the beneficiaries of the estate to pay your executor fee in advance. This way, you will not have to pay taxes on the full amount of the fee. Instead, you can claim it as income when it is paid to you.
- Claim the fee as a loan.
If you are not able to get the beneficiaries to pay your executor fee upfront, then consider claiming it as a loan. This means that you will not have to pay taxes on it right away, and you can claim the interest on the loan as a deduction on your taxes.
- Donate your fee.
For many executors, a reasonable executor fee is just not possible given their income and budget. In this case, it might be better to donate the money to a charity or religious institution that your client approved of while they were alive. As an added benefit, you will get a tax deduction on the full amount of the fee.
The Bottom Line
Executor fees can be a large sum of money, but there are ways to avoid paying taxes on them. By keeping good records, claiming your expenses, and asking the beneficiaries to pay upfront, you can make sure that you get the most out of this income. Just remember that you should not charge more than is reasonable for your time and labor, or the IRS might deem it to be taxable income.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.