![]() However, certain additional expenses are deductible in computing AGI, such as costs incurred for the administration of the estate or trust that would not have been incurred if the property were not held in the trust or estate. 67(e) generally states that an estate's or nongrantor trust's AGI is computed in the same manner as for an individual. 67(b) provides that all itemized deductions are subject to the 2% floor except for a specified list, which includes, among others, deductions for certain types of interest, state and local taxes, casualty losses, medical expenses, and charitable contributions. 67, miscellaneous itemized deductions are deductible by individuals only to the extent they exceed 2% of the individual's adjusted gross income (AGI). Practitioners need to know the choices available when making these allocations, in order to advise trustees and personal representatives about how to achieve the best tax outcome for the beneficiaries who ultimately claim the excess deductions. ![]() ![]() This taxpayer- favorable change allows the expenses that are still allowable as deductions to be identified separately from expenses that are not deductible.ĭespite this stated goal, the proposed regulations do not provide clarity on exactly how to compute the allocation among the three types of deductions that make up the excess deductions. Now, however, these excess deductions are to be divided among three categories of expenses. Prior to the proposed regulations, the excess deductions were combined into a single amount that the beneficiary would treat entirely as miscellaneous itemized deductions, which are not deductible through 2025. This topic is the focus of the present discussion. Because of the consistency between Notice 2018- 61 and this portion of the proposed regulations, many commentators believe it is unlikely there will be changes to it in the final regulations.Īnother portion of the proposed regulations explains how the TCJA's changes affect "excess deductions" - deductions exceeding an estate's or trust's income in its last tax year that typically pass to beneficiaries when the trust or estate terminates. The proposed regulations make clear that some deductions, including deductions for administrative expenses, are still available despite the suspension of miscellaneous itemized deductions by the law known as the Tax Cuts and Jobs Act (TCJA), P.L. Some portions of the proposed regulations are new, but others simply follow the language in Notice 2018- 61, which basically said that the IRS intended to maintain the deductibility of certain administrative costs incurred by estates and trusts. The proposed rules affect estates, nongrantor trusts (including the S portion of an electing small business trust (ESBT)), and their beneficiaries. The proposed regulations also explain how, on the termination of an estate or nongrantor trust, to determine the deductions in excess of gross income to which beneficiaries succeed. The IRS published proposed regulations ( REG- 113295- 18) on May 11, 2020, to clarify that certain deductions allowed to an estate or nongrantor trust are not miscellaneous itemized deductions and, thus, are unaffected by the suspension of miscellaneous itemized deductions for tax years beginning after 2017 and before 2026.
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