The Tax Cuts and Jobs Act (TCJA), effective January 1, 2018, significantly alters income tax planning considerations for individuals and businesses but also impacts fiduciary income tax planning for estates and trusts. One notable change is the elimination of miscellaneous itemized deductions for estates, trusts and their beneficiaries. Under prior law, many expenses were deductible to the extent that the total of such miscellaneous itemized deductions exceeded 2% of the taxpayer’s adjusted gross income. Now these expenses cannot be deducted at all.
For estates and trusts, common miscellaneous deductions included investment advisor fees, property ownership/maintenance costs (e.g. condo fees, insurance premiums, lawncare, automobile registration and insurance costs), and costs of pursuing claims unrelated to the existence of the estate (e.g. nursing home negligence). In many cases, these expenses were substantial and greatly reduced the income taxable to the estate, trust or beneficiaries. Estates and trusts may no longer deduct these common expenses under TCJA.
For individual taxpayers, a less common but sometimes beneficial miscellaneous deduction related to estates and trusts was excess deductions on termination. On an estate’s or trust’s final fiduciary income tax return, deductions in excess of income could be distributed to the beneficiaries. The beneficiaries could then include these inherited excess deductions in their miscellaneous itemized deductions, which again were deductible to the extent that the total exceeded 2% of their adjusted gross income. The elimination of miscellaneous itemized deductions makes these excess deductions totally worthless to beneficiaries.
While the elimination of miscellaneous deductions renders some former tax planning strategies inapplicable, other opportunities may be more valuable now. For example, it might now be more important that a Personal Representative or Trustee accelerate income prior to termination of an estate or trust to utilize excess deductions that cannot be used by beneficiaries.
A thorough understanding of TCJA and how it effects estates and trusts is critical to effective fiduciary income tax planning. If you are a Personal Representative, Executor, or Trustee responsible for filing such returns, do not hesitate to contact us for assistance.