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Level 1

1041 deductible attorney fees

1041 us income tax return for estates and trusts:  If a trustee paid an attorney to complete trust income tax forms; can the trustee deduct the attorney's fees on the tax return?  Also, does the trustee need to have the attorney complete a W-9?  (The trustee received the bill from the attorney after the 2015 tax forms were submitted.  So can the trustee deduct the fees on the 2016 income tax forms?) 


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Level 14

1041 deductible attorney fees

Legal fees to administer the Estate or Trust are legitimate deductions on the Form 1041.  They are deductible in the year of the expenditure, so if paid in 2016, deductible in 2016.  While you can always issue a Form 1099-MISC for payments made to a vendor [the attorney is not your employee], in my experience, I've never seen a Trustee issue a tax information report on payments made for legal services.

[2018 Tax Year Update] The following statement remains true however the TCJA tax law of 2018 eliminated the deductibility of legal fees on a personal 1040, so beware!
In the Final Year of the Trust or Estate, if the fees and other deductibles exceed the taxable income, the excess deductions can be passed through to the Beneficiaries for their use on their own Form 1040s. [note 2018 update]

For how to enter the tax accounting of executor fees paid see the following for the details.

=====================================================================

See the attached multipage PDF that walks you through the process in a Final Year of a Form 1041 allocating income, excess deductions, and other distributable amounts to the beneficiary.

  1. Executor Fees go to Trustee Fees in Deductions
  2. Generally such fees are allocable to all types of income
  3. In Final Year, even if not previously, distributions are made to the beneficiary or beneficiaries
  4. Unless the Will or Trust provided for explicit amounts to go to a beneficiary, it is usually by percentage.
  5. One beneficiary = 100%
  6. Note that negative distributable amount of "income" meaning that distributable amounts are of the excess deductions
  7. Distributable amounts to go to K-1 Worksheet
  8. K-1 Worksheet - note Box 11 Line A 
  9. Actual K-1 to be reported to IRS and beneficiary - note box 11 code A

2018 UPDATE - BEWARE THAT MISCELLANEOUS AND OTHER DEDUCTIONS ARE DISALLOWED 2018-2025) Excess Deductions occur only upon termination of the entity during the last tax year of the trust or decedent's estate, and when the total deductions (excluding the charitable deductions and the exemption available to the entity) are greater than the gross income for the entity for the year. These 'excess deductions' are reported in Box 11 of the Schedule K-1 (Form 1041) with a code of 'A'. Generally, a deduction based on a Net Operating Loss carryover is not available to the beneficiary as an excess deduction. However, if the final year tax return (Form 1041) filed by the trust or estate is also the final year in which the NOL carryover can be taken by the entity, then the NOL carryover may be taken as an excess deduction. For additional information see: Publication 536 - Net Operating Losses (NOL's) for Individuals, Estates or Trusts, also see 26 CFR 1.642(h)-4 - Excess deductions on termination of an estate or trust

13 Replies
Level 17

1041 deductible attorney fees

Are you asking if the fees are deductible on the trust return or on the trustees personal return?
Level 1

1041 deductible attorney fees

On the trustees personal return?
Level 14

1041 deductible attorney fees

Legal fees to administer the Estate or Trust are legitimate deductions on the Form 1041.  They are deductible in the year of the expenditure, so if paid in 2016, deductible in 2016.  While you can always issue a Form 1099-MISC for payments made to a vendor [the attorney is not your employee], in my experience, I've never seen a Trustee issue a tax information report on payments made for legal services.

[2018 Tax Year Update] The following statement remains true however the TCJA tax law of 2018 eliminated the deductibility of legal fees on a personal 1040, so beware!
In the Final Year of the Trust or Estate, if the fees and other deductibles exceed the taxable income, the excess deductions can be passed through to the Beneficiaries for their use on their own Form 1040s. [note 2018 update]

For how to enter the tax accounting of executor fees paid see the following for the details.

=====================================================================

See the attached multipage PDF that walks you through the process in a Final Year of a Form 1041 allocating income, excess deductions, and other distributable amounts to the beneficiary.

  1. Executor Fees go to Trustee Fees in Deductions
  2. Generally such fees are allocable to all types of income
  3. In Final Year, even if not previously, distributions are made to the beneficiary or beneficiaries
  4. Unless the Will or Trust provided for explicit amounts to go to a beneficiary, it is usually by percentage.
  5. One beneficiary = 100%
  6. Note that negative distributable amount of "income" meaning that distributable amounts are of the excess deductions
  7. Distributable amounts to go to K-1 Worksheet
  8. K-1 Worksheet - note Box 11 Line A 
  9. Actual K-1 to be reported to IRS and beneficiary - note box 11 code A

2018 UPDATE - BEWARE THAT MISCELLANEOUS AND OTHER DEDUCTIONS ARE DISALLOWED 2018-2025) Excess Deductions occur only upon termination of the entity during the last tax year of the trust or decedent's estate, and when the total deductions (excluding the charitable deductions and the exemption available to the entity) are greater than the gross income for the entity for the year. These 'excess deductions' are reported in Box 11 of the Schedule K-1 (Form 1041) with a code of 'A'. Generally, a deduction based on a Net Operating Loss carryover is not available to the beneficiary as an excess deduction. However, if the final year tax return (Form 1041) filed by the trust or estate is also the final year in which the NOL carryover can be taken by the entity, then the NOL carryover may be taken as an excess deduction. For additional information see: Publication 536 - Net Operating Losses (NOL's) for Individuals, Estates or Trusts, also see 26 CFR 1.642(h)-4 - Excess deductions on termination of an estate or trust

Level 1

1041 deductible attorney fees

Thank you very much for the quick response.
Level 14

1041 deductible attorney fees

You are most welcome - and as it is time approaching New Year's Eve, and given my former life, I wish you a SAFE weekend!
Level 1

1041 deductible attorney fees

where does the info go on  the k-1?
Level 1

1041 deductible attorney fees

I even purchased TurboTax for business, and it does not offer a place to do this!  So how do you generate the K1?  Do the legal fees go as NOL or something else on the K1?
Level 14

1041 deductible attorney fees

@johkur999 @graciejean  The original question made no mention of the nature that you are now asking so of course there was no answer to what you are now asking.  Always ask a new question when the original question has nothing to do with your request.  This original question only dealt with executor fees as to allowable and now with the line on which expenses are reported
Level 1

1041 deductible attorney fees

You wrote "In the Final Year of the Trust or Estate, if the fees and other deductibles exceed the taxable income, the excess deductions can be passed through to the Beneficiaries for their use on their own Form 1040s." and so I was asking, specific to your comment, how you actually provide that deduction?  Schedule K-1?  And where?  Turbotax itself provided no insight.
Highlighted
Level 20

1041 deductible attorney fees

The excess deductions will appear on Schedule K-1 on Line 11 with an "A" code (for "excess deductions").

In TurboTax Business, you actually need to indicate that you made a "distribution" of the negative amount. You also need to ensure that you indicated the return is the final return.
Level 14

1041 deductible attorney fees

Now that you have asked your specific question - see answer below
Level 14

1041 deductible attorney fees

@dajakaro Apparently, after issuing a complaint that the first answer did not provide an answer to the question that you did not ask, a second answer that specifically responds to the question that you ultimately asked was posted with a pathfinder document to walk you through, yet you failed to ever come back and read it.
Level 14

1041 deductible attorney fees

See the attached multipage PDF that walks you through the process in a Final Year of a Form 1041 allocating income, excess deductions, and other distributable amounts to the beneficiary.

  1. Executor Fees go to Trustee Fees in Deductions
  2. Generally such fees are allocable to all types of income
  3. In Final Year, even if not previously, distributions are made to the beneficiary or beneficiaries
  4. Unless the Will or Trust provided for explicit amounts to go to a beneficiary, it is usually by percentage.
  5. One beneficiary = 100%
  6. Note that negative distributable amount of "income" meaning that distributable amounts are of the excess deductions
  7. Distributable amounts to go to K-1 Worksheet
  8. K-1 Worksheet - note Box 11 Line A 
  9. Actual K-1 to be reported to IRS and beneficiary - note box 11 code A

Excess Deductions occur only upon termination of the entity during the last tax year of the trust or decedent's estate, and when the total deductions (excluding the charitable deductions and the exemption available to the entity) are greater than the gross income for the entity for the year. These 'excess deductions' are reported in Box 11 of the Schedule K-1 (Form 1041) with a code of 'A'. Generally, a deduction based on a Net Operating Loss carryover is not available to the beneficiary as an excess deduction. However, if the final year tax return (Form 1041) filed by the trust or estate is also the final year in which the NOL carryover can be taken by the entity, then the NOL carryover may be taken as an excess deduction. For additional information see: Publication 536 - Net Operating Losses (NOL's) for Individuals, Estates or Trusts, also see 26 CFR 1.642(h)-4 - Excess deductions on termination of an estate or trust