Recent IRS Regulation concerning Excess Deductions on Termination of Estates

[chl11942]

The attorney who prepared the Form 1041 and Schedule K-1 for my mother’s estate called the following information from the IRS to my attention.

IRS provides final regulations on deductions for estates and non- grantor trusts, including excess deductions on termination 

IR-2020-217, September 21, 2020 

WASHINGTON — The Internal Revenue Service today issued final regulations ! that provide guidance for decedents' estates and non-grantor trusts clarifying that certain deductions of such estates and non-grantor trusts are not miscellaneous itemized deductions. 

The Tax Cuts and Jobs Acts (TCJA) prohibits individuals, estates, and non-grantor trusts from claiming miscellaneous itemized deductions for any taxable year beginning after December 31, 2017, and before January 1, 2026. 

Specifically, the final regulations clarify that the following deductions are allowable in figuring adjusted gross income and are not miscellaneous itemized deductions: 

Deductions for costs paid or incurred in connection with the administration of the estate or trust which would not have been incurred if the property were not held in such estate or non-grantor trust.
The deduction concerning the personal exemption of an estate or non-grantor trust.
The distribution deductions for trusts distributing current income. 

The distribution deductions for trusts accumulating income. 

In addition, the final regulations provide guidance on determining the character and amount of, as well as the manner for allocating, excess deductions that beneficiaries succeeding to the property of a terminated estate or non-grantor trust may claim on their individual income tax returns. 

For more information about this and other TCJA provisions, visit IRS.gov/taxreform. Page Last Reviewed or Updated: 19-Oct-2020 

I am using Turbo Tax Deluxe for 2020 income tax returns.

I have entered the Excess Deductions for my mother’s estate in the Box 11A (Excess Deductions) field of my Schedule K-1 information.

I have also entered an amount in the Box 11C (Long-term Capital Loss Carryover) field of my Schedule K-1 information.

Schedule D, Line 12 of my 2020 income tax return shows the Capital Loss reported in Box 11C of my Schedule K-1 information.

But the Adjusted Gross Income shown on my Form 1040 for 2020 has not been reduced for the Excess Deductions reported in Box 11A of my Schedule K-1 information.

Shouldn’t the Adjusted Gross Income on my Form 1040 be reduced for the Excess Deductions from my mother’s estate as provided by the final IRS regulations dealing with this matter?

[tagteam · Accepted solution]

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@chl11942 wrote:

But the Adjusted Gross Income shown on my Form 1040 for 2020 has not been reduced for the Excess Deductions reported in Box 11A of my Schedule K-1 information.

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The reason you are not seeing the deduction is that TurboTax does not know precisely how to handle the figure in Box 11A since the Regulations specify three different categories of excess deductions:

1) Amounts allowed in arriving at AGI

2) Non-miscellaneous itemized deductions

3) Miscellaneous itemized deductions

See https://www.federalregister.gov/documents/2020/10/19/2020-21162/effect-of-section-67g-on-trusts-and-...

Therefore, you need to inquire as to the exact nature of the deduction(s) taken by the estate.

If the deductions are all classified as miscellaneous itemized deductions, then you will have no deduction since these types of deductions were eliminated by tax reform (the TCJA).

Deductions that are non-miscellaneous itemized deductions should be entered on Line 16 of Schedule A while the deduction of amounts allowed in arriving at AGI should be entered on Schedule 1.

Note that non-miscellaneous itemized excess deductions should appear in Box 11B of a K-1 (1041) for the 2020 tax year and the IRS is still in the process of finalizing drafts of some 2020 forms and schedules.

[chl11942]

Thank you for your informative and very helpful reply.

Here is some material I just found in the instructions for Schedule K-1 for 2020 that appears to provide the answer.

START OF BOX 11, CODE A INSTRUCTIONS - -

Box 11, Code A—Excess Deductions on Termination - Section 67(e) Expenses 

If this is the final return of the estate or trust, and there are excess deductions on termination that are section 67(e) expenses reported to you as a beneficiary, you may deduct the excess deductions shown in box 11, code A, as an adjustment to income. Report this amount as a write-in on Schedule 1 (Form 1040), Part II, line 22. On the dotted line next to line 22, enter the amount of the expense using the code “ED67(e)”. Include the expense in the total amount reported on line 22. 

See Final Regulations - TD9918, for examples of allowable excess deductions on termination of an estate or trust. 

Note. The regulations are applicable for tax years beginning after 2017. 

Excess deductions on termination occur only during the last tax year of the trust or decedent’s estate when the total deductions (excluding the charitable deduction and exemption) are greater than the gross income during that tax year. Only the beneficiary of an estate or trust that succeeds to its property is allowed to deduct that entity’s excess deductions on termination. A beneficiary who doesn’t have enough income in that year to absorb the entire deduction can’t carry the balance over to any succeeding year. 

END OF BOX 11, CODE A INSTRUCTIONS

Turbo Tax will not let me enter the Box 11, Code A amount into Schedule 1 at this time.  I expect this is one of the areas where Intuit still has work to do since the 2020 instructions for Schedule K-1 are dated Dec. 09, 2020. 

Again, thank you for your reply.

[tagteam]

The following is a link to the federal register that contains the applicable regulations.

https://www.federalregister.gov/documents/2020/10/19/2020-21162/effect-of-section-67g-on-trusts-and-...

[Temecularevev]

What will be the correct version of Turbo Tax to enter the Excess Deductions on Termination - Section 67(e) Expenses?  The K-1 also reports Short Term and Long Term Capital Gains. What Turbo Tax version for these gains?

[tagteam]

@Temecularevev If you want to use an online version of TurboTax, you need to use Premier or Self-Employed to enter information from a K-1. Otherwise, any desktop (installed) version will suffice,

[Temecularevev]

Thank you.

Temecularevev

[dcgolner]

I have the Deluxe version of TurboTax installed on my PC.  When I enter the amount from my schedule K-1 into TTax, it does not show up on 1040-SR from schedule 1 to revise the AGI.  The deductions oar for fiduciaries and attorneys fees, so they are allowable expenses per the IRS.  How can I get these to record properly?

Thx

[tagteam]

@dcgolner Enter the figure in Forms Mode on the 1040/1040SR Worksheet (see screenshot).

[Temecularevev]

Thank you

[wmbaker3]

Looks like TT has automated the Excess Deduction Ruling into 2020 TT Premier. You can enter the ED at 11a in the Estate K-1 section and it will flow to Sche 1 line 22 (with the ED67(e)) and then to line 10a on the 1040. No change in the 2018 year so far (for amendments).

[Temecularevev]

Thank you!!!

[wmbaker3]

DC Golner - That should be fixed now, update TT then try again.

[wmbaker3]

Does anyone know if TT will fix the Excess Deduction issue in 2018 like they did in 2020. The 2020 works sweet...!! 

[tagteam]

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@wmbaker3 wrote:

Does anyone know if TT will fix the Excess Deduction issue in 2018 like they did in 2020. 

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I will bet anything TurboTax (Intuit) will do nothing with editions older than 2020 since the effective date of the regulations is 10/19/2020.

See Federal Register :: Effect of Section 67(g) on Trusts and Estates