September 29, 2020
By Lance Lvovsky, Senior Manager, Tax & Business Services & Matthew Brust, Staff, Tax & Business Services
On September 21, the Internal Revenue Service (IRS) issued final regulations providing guidance for decedents’ estates and non-grantor trusts, clarifying that certain deductions for such estates and non-grantor trusts are not miscellaneous itemized deductions. In addition, the final regulations clarify that excess deductions upon the termination of an estate or non-grantor trust are not affected by the suspension of miscellaneous itemized deductions for tax years 2018 through 2025. These final regulations also provide some guidance on determining the character, amount, and allocation of the excess deductions.
Background
The Tax Cuts and Jobs Acts (TCJA) prohibits individuals, estates, and non-grantor trusts from claiming miscellaneous itemized deductions for any taxable year beginning after December 31, 2017, and before January 1, 2026. These final regulations clarify that the following deductions are allowable in calculating adjusted gross income and are not miscellaneous itemized deductions:
- Estate or trust administrative costs that would not have been incurred if the property were not held in the estate or trust;
- The personal exemption of an estate or non-grantor trust; and
- Distribution deductions for trusts distributing current income and for estates and trusts accumulating income.
Examples of fully deductible expenses for estates and non-grantor trusts (on federal Form 1041) include trustee fees, executor fees, accounting and legal fees, expenses to maintain and preserve property of an estate when the property cannot be distributed to the beneficiaries, and certain appraisal fees. This list is not all-inclusive, and you should further consult with your tax advisor as to the deductibility of specific expenditures incurred by an estate or non-grantor trust.
Planning Opportunity
Investment advisory fees generally have been classified as miscellaneous itemized deductions and treated as non-deductible for tax years 2018–2025. The final regulations state that investment advisory fees charged to an estate or non-grantor trust exceeding those customarily charged to a hypothetical individual investor are fully deductible. For example, incremental costs of investment advice beyond the amount that normally would be charged to an individual investor, or incremental advisory costs attributable for specialized balancing of interests of various beneficiaries, may be fully deductible. Trustees and executors should review filed 2018 and 2019 tax returns, and discuss with their tax advisors as to whether an opportunity to file amended returns and claim tax refunds exists.
Excess Deductions on Termination of an Estate or Trust
The final regulations adopted the previously released proposed regulations, but clarified that beneficiaries of a trust or an estate may claim all or part of excess deductions in the last year of an estate or trust. These deductions are allowed before, after, or together with the same character of deductions separately allowable to the beneficiary. An example is accounting fees. These are deductible by the estate or non-grantor trust, but in the hands of the beneficiary would be miscellaneous itemized deductions and not allowed. The final regulations provide clarity that these deductions would generally be fully deductible by the beneficiary succeeding the estate or non-grantor trust property.
The Treasury has released guidance on how to report these excess deductions on the beneficiary’s Form 1040. The guidance indicates that the excess deductions should be reported on Form 1040, Schedule 1, as a negative item. In this guidance, the Treasury confirmed that the rules and limitations governing excess deductions from non-grantor trusts and estates will not apply to any net operating losses. This holds true even if the loss is generated by activity of the non-grantor trust or estate in its final year (separate rules apply to net operating losses from a business that flow to an estate or non-grantor trust, and generally, net operating losses will be carried over to beneficiaries succeeding estate or non-grantor trust property). In effect, an individual beneficiary receiving a “final” Schedule K-1 from an estate or non-grantor trust can claim excess deductions on termination of an estate or non-grantor trust, regardless of whether the beneficiary itemizes (uses Schedule A). Therefore, this presents yet another opportunity to review with your tax advisors whether amending 2018 and 2019 Forms 1040 (individual tax return) to claim certain excess deductions may yield a tax refund.
State Tax
We caution you to keep in mind that not all states conform to the federal law, and for estates and non-grantor trusts that file state income tax returns, further review with tax advisors is very important. For example, under California and New York law, investment advisory fees continue to be fully deductible for state income tax purposes. Contrast this to the federal law, which provides for a federal deduction on certain incremental investment advisory fees.
In closing, trustees and executors should review with tax advisors how these final regulations apply to their facts and circ*mstances. For more information, contact your Marcum Trusts and Estates tax advisor, or Lance Lvovsky, CPA at 954.320.8077 or [emailprotected].
FAQs
This document contains final regulations clarifying that the following deductions allowed to an estate or non-grantor trust are not miscellaneous itemized deductions: Costs paid or incurred in connection with the administration of an estate or non-grantor trust that would not have been incurred if the property were not ...
What is the final regulations TD9918? ›
Under Final Regulations - TD9918, each excess deduction on termination of an estate or trust retains its separate character as an amount allowed in arriving at adjusted gross income, a non-miscellaneous itemized deduction, or a miscellaneous itemized deduction.
What is the tax treatment of a non grantor trust? ›
The income generated by a non-grantor trust is generally taxed at the trust level rather than being passed through to the grantor's individual income tax return. If the trust earnings are distributed, however, they are then taxed directly to the beneficiaries.
What expenses can be deducted on an estate 1041? ›
On Form 1041, you can claim deductions for expenses such as attorney, accountant and return preparer fees, fiduciary fees and itemized deductions. After the section on deductions is complete you'll get to the kicker – taxes and payments.
What is the standard deduction for a trust and estate? ›
An estate is allowed a $600 deduction in place of the personal exemption provided by IRC § 151. A trust that is required to distribute all of its income currently (a simple trust) is allowed a $300 deduction; and all other trusts are allowed a $100 deduction (IRC § 642(b)).
What is the final 162 F regulation? ›
Section 162(f)(1) denies a deduction for any amount paid or incurred to, or at the direction of, a government or governmental entity as a result of violating any law or the investigation or inquiry into the potential violation of any law (i.e., fines and penalties).
What is 1446 final regulations? ›
The withholding obligation under Section 1446(f) serves as an enforcement mechanism for gains that are ECI pursuant to Section 864(c)(8) and requires the transferee of a partnership to withhold 10 percent of the amount realized on the disposition of a relevant partnership interest.
Are fiduciary fees deductible in a non-grantor trust? ›
This supports a position that administration expenses that are unique to an estate or trust, such as fiduciary fees, are still deductible under the new law. Another example of such a unique administration expense is the tax preparation fee for estates and nongrantor2 trusts.
Who controls a non-grantor trust? ›
A non-grantor trust is an arrangement in which the donor (grantor) withdraws all of his/her control from the trust. Essentially, he or she gives up control over the assets and any income they produce -- an example would be a property that generates rental income or stock positions that pay dividends.
Do beneficiaries pay income tax on trust distributions? ›
Distributions From Trust Income
When a portion of a beneficiary's distribution from a trust or the entirety of it originates from the trust's interest income, they generally will be required to pay income taxes on it, unless the trust has already paid the income tax.
These deductions may include mortgages and other debts, estate administration expenses, property that passes to surviving spouses and qualified charities. The value of some operating business interests or farms may be reduced for estates that qualify.
What deductions are available to reduce the estate tax? ›
What deductions are available to reduce the estate tax?
- Charitable deduction: If the decedent leaves property to a qualifying charity, it is deductible from the gross estate.
- Mortgages and debt.
- Administration expenses of the estate.
- Losses during estate administration.
Miscellaneous itemized deductions for an estate or trust include items such as investment management or custodial fees and property expenses such as insurance premiums, association fees, and maintenance or repair costs on assets owned by an estate or trust not treated as business assets (Schedule C or F) or for the ...
What deductions can a trust take? ›
Certain fiduciary expenses not commonly incurred by individuals, such as probate court fees and costs, fiduciary bond premiums, legal publication costs of notices to creditors or heirs, the cost of certified copies of the decedent's death certificate, and costs related to fiduciary accounts.
How much is the exemption for an estate on a 1041? ›
A decedent's estate, in which case a $600 exemption is allowed. A qualified disability trust, in which case a $4,700 exemption is allowed.
Can a trust deduct executor fees? ›
Specifically, are executor fees deductible on Form 1041? The short and long answer is yes.
What are the final 409A regulations? ›
The Final Regulations provide that Section 409A does not apply to an amount that an employer pays under a separation pay plan if the amount (1) does not exceed two times the lesser of (a) the employee's total annualized compensation based upon the employee's annual rate of pay in the previous calendar year or (b) ...
What are the final tangibles regulations? ›
The final tangibles regulations apply to anyone who pays or incurs amounts to acquire, produce, or improve tangible real or personal property. These regulations apply to corporations, S corporations, partnerships, LLCs, and individuals filing a Form 1040 or 1040-SR with Schedule C, E, or F.
What are final regulations? ›
Final regulations are rules or requirements formally approved by the Office of Administrative Law and published in the California Code of Regulations . These include regulations that became effective within the last year.
What are the final regulations under TD 9945? ›
The final regulations remove the terms Passthrough Capital Allocation, Passthrough Interest Capital Allocation, and Passthrough Interest Direct Investment Allocation, and instead provide that an allocation made to a Passthrough Entity that holds an API in a lower-tier Passthrough Entity will be considered a Capital ...
