On Friday July 13, 2018, the IRS announced they will be publishing regulations related the suspension of miscellaneous itemized deductions and how it impacts non-grantor trusts and estate filings starting with tax year 2018. Currently the Tax Cuts and Jobs Act suspended all miscellaneous itemized deductions for individual taxpayers.
The new tax law was silent though when it came to non-grantor trust and estates and miscellaneous itemized deductions. Many tax experts believe the miscellaneous itemized deductions will remain a deduction for these types of filings. The main deductions in question are legal and attorney fees, CPA preparation and consulting fees, and investment and brokerage fees. Depending on the estate or trust administration, these fees can reach large amounts quickly.
In addition to miscellaneous itemized deductions, the limits to the state and local taxes including sales, income, and property taxes are in question as well. For married filing joint individual tax filings, the total deductible amount is capped at $10,000. The Tax Cuts and Jobs Act was silent when it came to non-grantor and estate income tax filings. Like the miscellaneous itemized deductions, it is anticipated the deduction will not follow the same standards as individual tax filings.
There has been some talk in high income tax states such as New York and California of state-run charities funds for individuals to skirt the $10,000 cap on state and local taxes paid. The IRS and Treasury Department have both stepped in and said they will discourage this practice though.
The announcement of regulations for non-grantor trusts and estates related to the deductions is promising though. Specifically, IRS Notice 2018-61 states the following “The Treasury Department and the IRS intend to issue regulations clarifying that estates and non-grantor trusts may continue to deduct expenses described in section 67(e)(1) (allows items to be deducted if they are paid or incurred in connection with administering the trust or estate and would not have been incurred if the property were not held in such trust or estate) and amounts allowable as deductions under section 642(b), 651 or 661, including the appropriate portion of a bundled fee, in determining the estate or non-grantor trust’s adjusted gross income during taxable years, for which the application of section 67(a) (2% itemized deductions) is suspended pursuant to section 67(g) (suspension of miscellaneous itemized deductions). Additionally, the regulations will clarify that deductions enumerated in section 67(b) (includes state tax deduction in 67(b)(2)) and (e) continue to remain outside the definition of “miscellaneous itemized deductions” and thus are unaffected by section 67(g).” Fitzpatrick, Johnson & Associates CPAs commentary added is italicized.
In basic terms, the IRS is stating the changes from the Tax Cuts and Jobs Act has on individual itemized deduction will not influence non-grantor trusts and estate income tax filings. As more and more regulations are released related to the Tax Cuts and Jobs Act, this will create specific planning opportunities when it comes to passing assets through gifting and death and opportunities for asset protection.
When it comes to estate planning, estate administration, and trust administration, be sure to give Fitzpatrick, Johnson & Associates CPAs a call, (503) 472-0576, to see how our experience in the field can help you.
Fitzpatrick, Johnson & Associates CPAs is a full-service accounting firm with a team of Certified Public Accountants providing tax, financial statement, and bookkeeping services. We are based in McMinnville, Oregon in the heart of Oregon’s wine country, the Willamette Valley.