How to Deduct Estate Administrative expenses on form 1040

[cbintheheezy]

Where do I deduct probate court fees on form 1040.  I have researched that this expense is excluded from the 2% floor of the estate.

[tagteam · Accepted solution]

" I have researched that this expense is excluded from the 2% floor of the estate."

If you insist and are bound and determined to enter the expenses as a deduction on your individual income tax return, then the closest you are going to come with an online version of TurboTax (since there is no Forms Mode where you can do overrides on the forms) is to enter the expenses as an estate tax deduction (see screenshots).

You might want to reconsider the foregoing, and taking the stance set forth in your question, in light of the following:

https://www.irs.gov/publications/p529/ar02.html#en_US_2016_publink100027003

https://www.irs.gov/help-resources/tools-faqs/faqs-for-individuals/frequently-asked-tax-questions-an...

[maglib]

turbotax does not allow this fee deduction.  Even in k-1 input. Although there is a stance that fiduciary fees are not itemized deductions being taken by many and here is a journal of accountancy article. You can deduct them in 1041 for non-grantor trusts in turbotax business.  All grantor treatment type trusts though do not have this ability.
 <a rel="nofollow" target="_blank" href="https://www.journalofaccountancy.com/news/2014/may/201410110.html">https://www.journalofaccountancy....>

They gave me a link now explaining that no Fiduciary Trustee fees are subject to 2% rule that otherwise would not be paid by an ordinary person... They say Do NOT confuse them with Investment management and advisory fees which are still subject to 2% rule although still can reduce Net investment income taxes.  (note I read IRC and all its circular and still don't see it but here they still claim it) and then still can't figure how to claim... the 1041 didn't work out as I have gains with no basis and the first question is about who is grantor-  then does not fill it out right any way and I saw on the pro site, even that isn't working to be able to deduct them.  ugg

The IRS issued final regulations on the controversial question of which costs incurred by trust and estates are subject to the 2% floor on miscellaneous deductions under Sec. 67(a) (T.D. 9664). The regulations will apply to tax years beginning on or after May 9, 2014. The final regulations retain from the proposed rules a requirement that certain fees be unbundled.

The regulations finalize proposed rules issued in September 2011 (REG-128224-06) in response to the U.S. Supreme Court’s decision inKnight, 552 U.S. 181 (2008), on the income tax deductibility by estates and nongrantor trusts of investment advisory and other fees. Under Knight, fees paid to an investment adviser by a nongrantor trust or estate are generally miscellaneous itemized deductions subject to a floor of 2% of adjusted gross income (AGI), rather than fully deductible as an expense of administering an estate or trust under Sec. 67(e)(1). The Supreme Court held that the latter provision limits its treatment to expenses that would not “commonly” or “customarily” be incurred if the property were held by an individual.

The regulations implement the Court’s “commonly or customarily incurred” requirement by stating that a fee is deductible to the extent it exceeds the fee generally charged to an individual investor, where the excess is “attributable to an unusual investment objective” of the trust or estate or to “the need for a specialized balancing of the interests of various parties … such that a reasonable comparison with individual investors would be improper” (Regs. Sec. 1.67-4(b)(4)).

The final rules adopt the proposed regulations with a few modifications in response to comments. The proposed regulations provided that costs that do not depend on the whether payer is an individual or an estate or trust count as costs that are commonly or incurred by an individual. One commentator said that this treatment was overly broad and was a disguised attempt to reassert the IRS’s effort, rejected in Knight, to subject any costs that could be incurred by an individual to the 2% floor. The IRS agreed with this and removed the reference to costs that do not depend on the payer’s identity.

The second change made technical corrections to several examples of ownership costs that are not usually deductible. One, in particular, was to remove an example that included real estate taxes in ownership costs that would not be fully deductible because, as was pointed out, they are not an itemized deduction but are fully deductible under Sec. 62(a)(4) or Sec. 164(a).   

A more significant change was the addition of appraisal fees to the category of costs that are fully deductible if they are needed to determine the value of property as of the decedent’s date of death (or the alternate valuation date), to determine value for purposes of making distributions, or to properly prepare the estate or trust’s tax returns. The final rules also add a nonexclusive list of other fiduciary expenses that are not commonly or customarily incurred by individuals: probate court fees and costs; fiduciary bond premiums; legal publication costs of notices to creditors or heirs; the cost of certified copies of the decedent’s death certificate; and costs related to fiduciary accounts.

Bundled fees

In the preamble to the final regulations, the IRS explains that it received many comments on the treatment of “bundled” fees in the proposed regulations. Bundled fees are fees that are billed together, where a portion is fully deductible and another is subject to the 2%-of-AGI floor. The proposed regulations would require the deductible and nondeductible portions to be “unbundled”—that is, allocated between costs that are subject to the 2% floor and those that are not. The proposed regulations contain one exception to the allocation requirement: If a bundled fee is not computed on an hourly basis, only the portion attributable to investment advice (including any related services that would be provided to any individual investor as part of the investment advisory fee) is subject to the 2% floor.
 
Commentators objected to the administrative difficulty of unbundling fiduciary fees, and the IRS did not enforce unbundling pending the issuance of final regulations (Notice 2011-37). However, despite the objections of these commentators, the final regulations do include the unbundling requirement.
 
Generally, under the final regulations, the portion of a bundled fiduciary fee attributable to investment advice (including any related services that would be provided to any individual investor as part of an investment advisory fee) will be subject to the 2% floor. Any fiduciary fee not allocated to investment advice and not calculated on an hourly basis may be fully deductible without regard to the 2% floor, except for (1) payments made to a third party out of the bundled fee that would have been subject to the 2% floor if paid directly by the trust or estate and (2) separately assessed expenses (in addition to usual or basic fees or commissions) that are commonly or customarily incurred by an individual.

If amounts are allocable to investment advice but are not traceable to separate payments, the final regulations allow the use of “any reasonable method” to make the allocation to investment advice. The regulations include a listing of the facts that may be considered in determining whether an allocation is reasonable.

— Sally P. Schreiber ( <a rel="nofollow" target="_blank" href="mailto:sschreiber@aicpa.org">sschreiber@aicpa.org</a> ) is a JofA senior editor.

[maglib]

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