Prior to the 2017 Tax Cuts And Jobs Act (TCJA) these administrative expenses generally fell into the miscellaneous itemized deduction bucket. The TCJA suspended miscellaneous deductions until Jan. 1, 2026. This had created uncertainty about whether an estate, a non-grantor trust or an individual beneficiary could still claim them in the interim.
In July, the IRS issued a notice clarifying its position on the topic. Estates and non-grantor trusts will still be able to deduct these expenses. A beneficiary, however, might not be able to deduct them after termination of an estate or trust.
What expenses might qualify for the deduction?
We won’t get into all the analysis about itemized versus above-the-line deductions, but will instead focus on categories of deductible expenses. They include:
- Accountant or tax return preparer fees for estate and trust tax returns (IRS Form 1041)
- Attorney fees, for example defending against an undue influence claim
- Trustee fees (i.e., the yearly cost of professional trust management services)
- Expenses associated with management and maintenance of property
- A portion of investment advisory fees
- Fees paid to a personal representative/fiduciary to administer the estate
Keep accurate records to support any of these potential deductions. Some may not be fully deductible, but can still offset income.
Why is there a limit on beneficiary deductions?
The IRS is still reviewing the treatment of deductions upon the termination of an estate or trust. Stay tuned for more information.
Here is what we do know from the July notice. A net-operating carryover or capital loss would likely be deductible to the beneficiary. Other types of losses, such as charitable contributions that exceed gross income, might not qualify, having fallen under miscellaneous deductions.
If appointed as a trustee or personal representative (executor) of an estate in Colorado, you can claim reasonable fees related to administering the trust or estate. While these might be deducted by the estate or trust, they are taxable ordinary income to you.
The federal estate tax threshold increased to $11,180,000 for 2018 and will be $11.4 million in 2019, but this does not erase federal estate and trust tax return reporting obligations. Administration of an estate or trust comes with costs and accurate record-keeping ensures that available deductions are used.