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Transfer of Unused Deductions to Beneficiaries: Taxes After a Death (2025 IRS Guide)

This guide covers “Transfer of Unused Deductions to Beneficiaries” within taxes after a death. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 559 (2025), Survivors, Executors, and Administrators, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

The termination of an estate is generally marked by the end of the period of administration and by the distribution of the assets to the beneficiaries under the terms of the will or under the laws of succession of the state if there is no will. These beneficiaries may or may not be the same persons as the beneficiaries of the estate's income.

Transfer of Unused Deductions to Beneficiaries

If the estate has unused loss carryovers or excess deductions for its last tax year, they are allowed to those beneficiaries who succeed to the estate's property. See Successor beneficiary, later.

Note:

See Notice 2018-61 and Regulations section 1.67-4 for more information about allowable beneficiary deductions.

Unused loss carryovers.

An unused NOL carryover or capital loss carryover existing upon termination of the estate is allowed to the beneficiaries succeeding to the property of the estate. That is, these deductions will be claimed on the beneficiary's tax return. This treatment occurs only if a carryover would have been allowed to the estate in a later tax year if the estate had not been terminated.

Both types of carryovers generally keep their same character for the beneficiary as they had for the estate. However, if the beneficiary of a capital loss carryover is a corporation, the corporation will treat the carryover as a short-term capital loss regardless of its status in the estate. The NOL carryover and the capital loss carryover are used in figuring the beneficiary's AGI and taxable income. The beneficiary may have to adjust any NOL carryover in figuring the AMT.

The first tax year to which the loss is carried is the beneficiary's tax year in which the estate terminates. If the loss can be carried to more than 1 tax year, the estate's last tax year (whether or not a short tax year) and the beneficiary's first tax year to which the loss is carried each constitute a tax year for figuring the number of years to which a loss may be carried. A capital loss carryover from an estate to a corporate beneficiary will be treated as though it resulted from a loss incurred in the estate's last tax year (whether or not a short tax year), regardless of when the estate actually incurred the loss.

If the last tax year of the estate is the last tax year to which an NOL may be carried, see No double deductions, later. For a general discussion of NOLs, see Pub. 536. For a discussion of capital losses and capital loss carryovers, see Pub. 550.

Excess deductions.

If the deductions in the estate's last tax year (other than the exemption deduction or the charitable contributions deduction) are more than gross income for that year, the beneficiaries succeeding to the estate's property can claim the excess as a deduction in figuring taxable income. To establish these deductions for the beneficiaries, a return must be filed for the estate along with a schedule showing the computation of each kind of deduction and the allocation of each to the beneficiaries.

Under IRS.gov/irb/2020–45_IRB#TD-9918, each excess deduction on termination of an estate or trust retains its separate character as an amount allowed in arriving at AGI, a non-miscellaneous itemized deduction, or a miscellaneous itemized deduction. For more information, see the Instructions for Form 1041.

No double deductions.

An NOL deduction allowable to a successor beneficiary can't be considered in figuring the excess deductions on termination. However, if the estate's last tax year is the last year in which a deduction for an NOL can be taken, the deduction, to the extent not absorbed in the last return of the estate, is treated as an excess deduction on termination. Any item of income or deduction, or any part thereof, taken into account in figuring an NOL or a capital loss carryover of the estate for its last tax year can't be used again to figure the excess deduction on termination.

Successor beneficiary.

A beneficiary entitled to an unused loss carryover or an excess deduction is the beneficiary who, upon the estate's termination, bears the burden of any loss for which a carryover is allowed or of any deductions more than gross income.

If decedent had no will.

If the decedent had no will, the beneficiaries are those heirs or next of kin to whom the estate is distributed. If the estate is insolvent, the beneficiaries are those to whom the estate would have been distributed had it not been insolvent. If the decedent's spouse is entitled to a specified dollar amount of property before any distributions to other heirs and the estate is less than that amount, the spouse is the beneficiary to the extent of the deficiency.

If decedent had a will.

If the decedent had a will, a beneficiary normally means the residuary beneficiaries (including residuary trusts). Those beneficiaries who receive specific property or a specific amount of money aren’t ordinarily considered residuary beneficiaries, except to the extent the specific amount isn't paid in full.

Also, a beneficiary who isn't strictly a residuary beneficiary, but whose devise or bequest is determined by the value of the estate as reduced by the loss or deduction, is entitled to the carryover or the deduction. This includes the following beneficiaries.

  • A beneficiary of a fraction of the decedent's net estate after payment of debts, expenses, and specific bequests.

  • A nonresiduary beneficiary, when the estate is unable to satisfy the bequest in full.

  • A surviving spouse receiving a fractional share of the estate in fee under a statutory right of election when the losses or deductions are taken into account in determining the share. However, such a beneficiary doesn't include a recipient of a dower or curtesy, or a beneficiary who receives any income from the estate from which the loss or excess deduction is carried over.

Allocation among beneficiaries.

The total of the unused loss carryovers or the excess deductions on termination that may be deducted by the successor beneficiaries is to be divided according to the share of each in the burden of the loss or deduction.

Example.

Under the parent’s will, Ash is to receive $20,000. The remainder of the estate is to be divided equally between Ash’s siblings, Danny and Robin. After all expenses are paid, the estate has sufficient funds to pay Ash only $15,000, with nothing to Danny and Robin. In the estate's last tax year, there are excess deductions of $5,000 and $10,000 of unused loss carryovers. The total of the excess deductions and unused loss carryovers is $15,000 and Ash is considered a successor beneficiary to the extent of $5,000, so Ash is entitled to one-third of the unused loss carryover and one-third of the excess deductions. Ash’s siblings may divide the other two-thirds of the excess deductions and the unused loss carryovers between them.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.

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