Should a Trust be an IRA Beneficiary?
Should a Trust be an IRA Beneficiary? Most owners of IRA accounts name a beneficiary or beneficiaries to receive the assets upon the death of the IRA owner. But much…
November 16th, 2020
Bewitched by estate or trust miscellaneous itemized deductions?
Bothered if expenses are specific to an estate or trust?
Bewildered by estate or trust net operating losses or capital losses?
I assure you it won’t take one whole quart of brandy to get through this…
The Tax Cuts and Jobs Act (TCJA) (§67(g) of TCJA, PL 115-97) eliminated miscellaneous itemized deductions for individuals during the TCJA period (2018-2025) (think those expenses subject to 2% of the taxpayer’s AGI). This law change also impacted estates and trusts.
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 (think Schedule C or F) or for the production of income (think Schedule E). These are not deductible by an estate or trust. However, the following types of expenses ARE deductible for an estate or trust under IRC §67(e):
The issue that arose from the deductible expense area is what happens in the final year of an estate or trust. These deductible expenses can result in excess deductions for the estate or trust. In years before TCJA, excess deductions upon the termination of an estate or trust would be picked up by the estate or trust beneficiaries via the final K-1 and typically be treated as miscellaneous itemized deductions subject to 2% of AGI on the beneficiaries Form 1040 Schedule A. The advent of TCJA left excess deductions as disallowed since miscellaneous deductions subject to 2% of AGI were eliminated during the TCJA years.
TD 9918 provides guidance and allows beneficiaries to deduct excess deductions upon the termination of an estate or trust by providing the following guidance:
Note. This section’s impact will require preparers of estate or trust final K-1s to identify the amounts and type of deductions passing through to beneficiaries on a final K-1 rather than merely providing a summary number of excess deductions as in the past.
That leaves how to deduct excess deductions. These would include the administrative expenses of an estate or trust (IRC §642(h)(2). The guidance explains such expenses are not miscellaneous expenses and therefore are permitted to be deducted under §67(e)) because these type of expenses would not have been incurred had the estate or trust not been established.
The Treasury Decision results in the beneficiaries being able to deduct these items as an adjustment to income on the beneficiary’s Form 1040. These are indicated on the estate or trust’s final K-1. This is a significant decision, especially given the fact that the result is an “above the line” deduction, rather than an itemized deduction, which often has been lost to the standard deduction.
The guidance of the Treasury Decision indicates it applies to tax years after December 31, 2017. If it’s practical, you may want to review 2018 and 2019 Form 1041 final returns to determine if amending them makes sense.
Even though the deduction was previously lost at the individual level, amending the 1041 would be the first place to start. This will be necessary to indicate to the beneficiaries the amount and type of excess deduction being passed through (i.e., NOL, capital loss, excess deductions). The issuer of the original K-1 would likely not have broken out these expenses on K-1s issued prior to the release of this guidance.
When amending 2018 returns, for excess deductions (§67(e)) used to arrive at the adjusted taxable income of the estate or trust and indicated on the estate or trust final K-1, write in the expense on Form 1040, Schedule 1, Line 36. Enter the amount of the adjustment and use code ED67(e) on the dotted line next to Line 36 of Schedule 1.
When filing or amending 2019 returns, report the excess deductions under §67(e) from the estate or trust final K-1 on Form 1040, Schedule 1, Part II, Line 22. Enter the amount of the adjustment and enter code ED67(e) next to the entry.
“…Wise at last, my eyes at last
Are cutting you down to your size at last
Bewitched, bothered and bewildered – no more…”
by Tom O’Saben, EA
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