Continuing to Decipher Estate and Trust Deduction Changes

In July 2018, the IRS issued Notice 2018-61 to provide insight on the suspension of miscellaneous itemized deductions for Trusts and Estates under newly enacted Internal Revenue Code Section 67(g). The notice highlighted deductions that did not fall specifically under the “miscellaneous itemized deductions” category, while suspending anything else not explicitly stated. We first reviewed the new code section here.

Notice 2018-61 further highlighted that “the Treasury Department and the IRS are studying whether … other deductions not subject to the limitations imposed … should continue to be treated as miscellaneous itemized deductions,” and specifically requested comments regarding sections 67(e) and 642(h)(2). The proposed rulemaking in response to the comments solicited was published by the IRS on May 11, 2020 under the federal registration 85 FR 27693.

Section 67(e) provides that “an estate or trust computes its adjusted gross income [AGI] in the same manner as an individual” except that an estate or trust may deduct costs paid in connection with administration. It also states that an estate or trust may take deductions concerning the personal exemption of an estate or non-grantor trust, the deduction for trusts distributing current income and the deduction for trusts accumulating income.

Commenters agreed that all deductions under the scope of Section 67(e) were not “miscellaneous itemized deductions” subject to the disallowance under Section 67(g), and that all deductions named under this category should continue to be taken. In the proposed regulation, the IRS agreed and allows these deductions to continue, since they are deductions used to compute AGI and are not considered “miscellaneous itemized deductions.”

Section 642(h), meanwhile, provides that if there is a net operating loss carryover or a capital loss carryover when the trust or estate is terminated, the carryover amount may be allowed as a deduction to the beneficiaries. This deduction can be comprised of (1) deductions allowable under AGI, (2) itemized deductions and (3) miscellaneous itemized deductions currently disallowed under section 67(g). Notice 2018-61 did not provide guidance on how to treat these excess deductions.

Commenters provided a number of observations and remarks with regard to Section 642(h)(2), ranging from requests for character, cost and computation segregation to concerns of prolonged administration trusts and estates. In the end, the IRS issued proposed regulations clarifying that each deduction enumerated above retains its separate character as an above-the-line deduction or as an itemized deduction.

While there’s still time for the public to submit further comments estates, non-grantor trusts, and their beneficiaries can rely on the above proposed rules for taxable years beginning after December 31, 2017. The ability to continue using these favorable deductions is another benefit to practicing effective estate planning.  

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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