Deductions & credits

trusts will be divided into three categories: grantor trusts, simple trusts, and complex. Only non-grantor trusts are simple or complex.

https://www.stetson.edu/law/conferences/materials/media/MC_21_Frigon_PPT.pdf

Stetson Law on Trusts

For grantor trusts, items of income and expense pass through to the grantor, and the trust is disregarded as a separate taxable entity. Thus, administration expenses for a grantor trust are attributed to the grantor/owner. Under the law that was in effect for 2017, those expenses were subject to the 2% floor. Under the new law, for tax years beginning after December 31, 2017 and before January 1, 2026, the entire deduction for miscellaneous itemized expense is eliminated for individual taxpayers.

Example One: In 2018, the taxable income of an irrevocable First Party Special Needs Trust is $77,000. $30,000 is from interest and $47,000 is from non?qualified dividends. All income is from money invested in mutual funds and bonds. Beneficiary A is a single person, the sole beneficiary of the trust and has no other personal income or deductions. The trust has the following expenses: fiduciary fees 10,000, Legal Fees 5,000, accounting fees $1,500 and investment advisory fees of $25,000. The Trust is a grantor trust and the beneficiary is the owner of Trust under I.R.C. § 671. No distributions were made to the beneficiary in 2018.

GRANTOR TRUST

Because the trust is a grantor trust, all of the income and expenses are attributable to Beneficiary A even though no distributions were made from the trust. The trust expenses for trustee, legal, accounting and investment advisory fees are categorized as “miscellaneous itemized deductions” subject to the 2% floor to the beneficiary. Miscellaneous itemized deductions for individuals were eliminated by the TCJA. Therefore, the beneficiary may not deduct any of these fees. In 2018, the standard deduction for a single person is $12,000. Accordingly, the trust beneficiary will not have any itemized deductions and will pay tax on $65,000.00 ($77,000 minus $12,000 standard deduction). The beneficiary’s tax liability for 2018 is calculated as follows:

Taxable Income Taxable Income $77,000.00 Less Standard Deduction $12,000.00 Gross Income $65,000.00 2018 Trust Tax Liability $ 0.00 Beneficiary Tax $10,239.50 If a beneficiary was under the age of 18, Kiddie Tax rates would increase tax owed by beneficiary to $21,660.00.

Using the same example as above but applying 2017 rules, the beneficiary tax results are calculated as follows: Gross Income $65,000.00 Miscellaneous Itemized deductions: $40,200.00 Personal Exemption $ 4,150.00 Taxable Income $20,650.00 Tax Due ? 2017 $ 2,645.00  vs. Tax Due – 2018 $10,239.50

COMPLEX TRUST

Example Two: In 2018, the taxable income of an irrevocable trust is $77,000. $30,000 is from interest and $47,000 is from non?qualified dividends. Beneficiary A is the sole beneficiary of the trust and has no other personal income or deductions. The trust has the following expenses: fiduciary fees 10,000, Legal Fees 5,000, accounting fees $1,500 and investment advisory fees of $25,000. The Trust is a separate taxable entity and the beneficiary is not the owner of any portion of Trust under I.R.C. § 671. The trust is a complex trust and qualifies as a Qualified Disability Trust. No distributions were made to or for the benefit of the beneficiary in 2018. The total tax liability for the Trust is calculated as follows:

Taxable Income for Trust Taxable Income $30,000.00 Dividends $47,000.00 Total Income $77,000.00 Less Deductions Trustee fees $10,000.00 Legal Fees $ 5,000.00 Accounting fees $ 1,500.00 Investment advisory fees $23,871.00 Taxable Income for Trust Gross Income $36,624.00 Less Exemption (QDT) $ 4,150.00 Taxable Income $32,579.00 2018 Trust Tax Liability $10,441.00 Medicare Surtax 3.8% $ 1,238.00 Total Federal Tax Trust $11,679.00 2018 Beneficiary Tax Liability $ 0.00

Same facts as Example Two, except that the trust distributes $35,000 to the beneficiary and the trust is not a grantor trust. Taxable Income for Trust Interest $30,000.00 Dividends $47,000.00 Total Income $77,000.00 Less Deductions Trustee fees $10,000.00 Legal Fees $ 5,000.00 Accounting fees $ 1,500.00 Investment advisory fees $23,871.00

Distribution Deduction $35,000.00 Trust Exemption (QDT) $ 4,150.00 Taxable Income $0.00 Trust Tax $0.00 Taxable Income for Beneficiary Trust Distribution $35,000.00 Standard Deduction $12,000.00 Taxable Income $23,000.00 Tax Beneficiary $ 2,570.00

Comparisons

Grantor Trust Tax – Example One: 2017 Beneficiary Tax $ 2,645.00 2018 Beneficiary Tax $10,239.50 Kiddie Tax $21,660.00

Complex Trust Tax (no Distribution) – Example Two with no distribution to beneficiary 2018 Trust Tax $10,441.00 2018 Beneficiary Tax $ 0.00

Complex Trust (with Distribution)– Example Two with distribution of $35,000 to beneficiary Taxable Income $ 0.00 Trust Tax $ 0.00 Beneficiary Tax $ 2,570.00