By Leslie C. Daane, CPA   ldaane@bvcocpas.com

Under the recently passed Tax Cuts and Jobs Act (TCJA), all miscellaneous itemized deductions that were subject to the two-percent floor were eliminated. Some of the deductions eliminated that fall under this category include unreimbursed employee expenses, investment fees, and tax preparation fees to name just a few that may impact you individually.

One such deduction that you may not be as familiar with is the excess deductions allowed a beneficiary on termination of an estate or trust. This deduction typically arises when an estate or trust is terminated and in the year of termination expenses are in excess of income. This “excess deduction” is then passed out to the beneficiary to report on their individual income tax return. Under the TCJA this deduction appears to have been eliminated.

The AICPA has provided a letter of comment to the IRS in response to Notice 2018-61 concerning this specific issue. These excess deductions can include expenses that are not limited to the two-percent floor on the estate or trust return but are “above the line” deductions. These include fiduciary fees, attorney fees, and accountant fees. Many times these are not paid until the final year thus resulting in the deductions exceeding the income in the final year. The AICPA’s position is that the beneficiaries should be allowed to deduct these expenses in the same manner as the trust or estate would have, “above the line.”

Treasury and the IRS intend to issue regulations to clarify if trusts and estates may continue to deduct these “above the line” deductions. However, it is unclear as to the outcome on the deductibility of “excess deductions” at the individual level.

As we launch into tax season, there are still many areas of the TCJA that have not been adequately addressed to date. I expect this will result in more extensions and possibly more amended returns once they get around to addressing the questions still unresolved.

The Tax Cuts and Jobs Act (TCJA) was approved by Congress and signed into law on December 22, 2017. It provides drastic changes to the Internal Revenue Code and affects taxpayers of all different types, including individuals, corporations, partnerships, estates, and trusts. Following are some of the key changes with regard to trusts and estates.

Prior to the TCJA, there were five tax brackets for trusts. The TCJA eliminated one tax bracket and decreased the overall tax rates for each bracket, reducing the top tax rate for trusts from 39.6% to 37%. Under the new law, if taxable income is:

Not over $2,550, the tax is 10% of taxable income;
Over $2,550 but not over $9,150, the tax is $255 plus 24% of the excess over $2,550;
Over $9,150 but not over $12,500, the tax is $1,839 plus 35% of the excess over $9,150;
Over $12,500, the tax is $3,011.50 plus 37% of the excess over $12,500.

While the overall tax rates are now reduced, the tax brackets are still very compressed with the top tax rate taking effect at $12,500.

The TCJA did not change the exemption amounts for trusts and estates. Estates, simple trusts, and complex trusts are still allowed a $600, $300, $100 exemption, respectively.

There are additional changes to trusts and estates under the TCJA, such as the deductibility of some expenses. For instance, trusts and estates are no longer able to deduct miscellaneous itemized deductions subject to the 2% of AGI limitation, such as investment management fees. For additional changes under the TCJA, check the IRS website.