Deductibility of Professional Fees on Trust/Estate Fiduciary Income Tax Returns
When the new tax law disallowed miscellaneous 2% deductions and personal exemptions, it was unclear how this would affect Estates and Non-Grantor Trusts. On 7/13/2018, the IRS issued Notice 2018-61 that announced the Treasury Department and IRS intend to issue regulations providing clarification.
In general, some deductions and the personal exemption will remain deductible by estates/trusts despite the fact that similar deductions will be disallowed for individual.
Background (Deductibility of Fiduciary Expenses under 67(e)):
The new IRC 67(g) disallows miscellaneous itemized deductions for any taxable year beginning after 12/31/2017 and before 1/1/2026.
However, IRC 67(e) provides an exception for Estates and Non-Grantor Trusts.
Under IRC 67(e), the AGI of an Estate or Non-Grantor Trust is computed in the same manner as an Individual, except that the following are treated as allowable in arriving at AGI (i.e., they are considered “above-the-line” deductions, not subject to the 2% limitation):
- The deductions for costs that are paid or incurred in connection with the administration of the estate or trust that would not have been incurred if the property were not held in the estate or trust; and
- The deductions allowable for the estate/trust’s personal exemption and distribution deduction
Typical 67(e) costs include:
- Trustee Fees
- Accounting Fees
- Attorney Fees
- Appraisal Fees
When the new law came out, professionals were unsure of whether 67(e) and its exception to omit certain deductions from the definition of “miscellaneous itemized deductions” would still apply to allow these deductions. Further, it was unclear if estates and non-grantor trusts could continue to claim a personal exemption since they are now disallowed for individuals.
The Treasury Department and IRS believe that 67(e) should remain unaffected by the new law. They intend to issue regulations clarifying that estates and non-grantor trusts may continue to deduct expenses described in 67(e) and amounts allowable as deductions under 642(b) (personal exemption), 651 and 661 (distribution deductions).
Additional guidance is still needed to determine the deductibility of excess deductions upon termination of an estate or trust.
If you have any questions the deductibility of professional fees on fiduciary income tax returns or any other tax questions, please contact our office at (952)476-7100.