Administrative Expenses for Trusts and Estates Will Remain Deductible

The Internal Revenue Service (the “IRS”) has announced in Notice 2018-61 (the “Notice”) that it plans to issue regulations clarifying that non-grantor trusts and estates can still take deductions for certain costs paid or incurred in the administration of the estate or trust.

The Tax Cuts and Jobs Act (the “Act”), signed into law late last year, added new Section 67(g) to the Internal Revenue Code (the “Code”). Code Section 67(g) provides that miscellaneous itemized deductions will not be permitted for tax years 2018 through 2025. Notwithstanding that provision, existing Code Section 67(e)(1) permits an estate or nongrantor trust, in computing its adjusted gross income (“AGI”), to deduct the costs that are paid or incurred in connection with the administration of the estate or trust that are unique to the administration.

Practitioners expressed concern that Code Section 67(g) could be read to eliminate the Code Section 67(e) deduction for administrative expenses. Many reasoned that, since Section 67(e) was not specifically removed from the Code when Section 67(g) was added, Congress did not intend to disallow deductions for administrative expenses. But since the IRS had not taken a formal position on the matter, the waters were muddied.

The Notice explains that administrative expenses deductible under Code Section 67(e) are above-the-line deductions allowable in computing AGI.  These expenses are therefore not included within the definition of itemized deductions. Accordingly, the suspension of the deductibility of miscellaneous itemized deductions does not affect the ability of a fiduciary to continue to deduct the costs paid or incurred in the administration of an estate or trust.

Estates and trusts reach their highest marginal tax brackets much quicker than individuals. Executors and trustees typically rely on deductions for administrative expenses to offset income that may otherwise be taxed at a high rate. Although the specific content of the forthcoming regulations remains to be seen, fiduciaries should rest assured that the deduction for administrative expenses will remain intact.

The Treasury Department and the IRS intend to issue regulations clarifying that estates and non-grantor trusts may continue to deduct administrative expenses. Although there is no set release date for these regulations, taxpayers may rely on the Notice for tax years beginning after December 31, 2017.     

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