IRS Clarifies Estate and Non-grantor Trust Expenses not Subject to Miscellaneous Itemized Deduction Suspension

In Notice 2018-61, the IRS and Treasury Department stated that they intend to issue Regulations clarifying which items estates and non-grantor trusts will still be able to deduct.  Under the Tax Cuts & Jobs Act “TCJA,” miscellaneous itemized deductions subject to the 2% of adjusted gross income floor have been suspended and can no longer be deducted in individual income tax returns.

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The adjusted gross income of an estate or trust is computed in the same manner as that of individual taxpayers.  Hence, with the elimination of the itemized deduction for miscellaneous expenses, the deduction for costs paid or incurred in connection with the administration of an estate or trust was effectively eliminated.  Notice 2018-61 excludes these items from the definition of miscellaneous itemized deductions for estates and trusts and effectively retains their character as above the line deductions for estates and trusts.  The notice also preserved the personal exemption deduction for estates and trusts.

Capital loss carryovers and net operating loss carryovers that pass out to beneficiaries of an estate or trust continue to retain their character as an above the line deduction in the hands of the beneficiary.  The IRS is continuing to study whether deductions that would not be subject to the suspension of miscellaneous itemized deductions at the estate or trust level should continue to be suspended at the individual level.

Regulations are forthcoming.