The IRS has released proposed regulations clarifying that the following deductions allowed to an estate or non-grantor trust are not miscellaneous itemized deductions:
- Costs paid or incurred in connection with the administration of an estate or non-grantor trust that would not have been incurred if the property were not held in the estate or trust
- The personal exemption of an estate or non-grantor trust
- The distribution deduction for trusts distributing current income
- The distribution deduction for estates and trusts accumulating income
These deductions are not affected by the suspension of the deductibility of miscellaneous itemized deductions for tax years beginning after December 31, 2017, and before January 1, 2026. The proposed regulations also provide guidance on determining the character, amount, and allocation of deductions in excess of gross income succeeded to by a beneficiary on the termination of an estate or non-grantor trust. Specifically, the proposed regulations clarify that the character of the deductions does not change when succeeded to by a beneficiary on termination of the estate or trust, and require the fiduciary to separately identify deductions that may be limited when claimed by the beneficiary. The proposed regulations affect estates, non-grantor trusts (including the S portion of an electing small business trust), and their beneficiaries.
Internal Revenue Code (IRC) Section 67(g), as added by the Tax Cuts and Jobs Act (TCJA), prohibits individual taxpayers from claiming miscellaneous itemized deductions for any tax year beginning after December 31, 2017, and before January 1, 2026. The Treasury Department and the IRS had issued Notice 2018-61, 2018-31 I.R.B. 278, announcing that proposed regulations would address the effect of IRC Section 67(g) on the deductibility of certain expenses described in IRC Section 67(b) and (e) incurred by estates and non-grantor trusts. The notice states that regulations would clarify that expenses described in IRC Section 67(e) remain deductible in determining the adjusted gross income of an estate or non-grantor trust during the tax years in which IRC Section 67(g) applies.
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