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Miscellaneous Deductions for Non-Grantor Trusts and Estates - By John R. Bullis, CPA

Updated: Feb 21, 2023

Beginning in 2018, individual taxpayers do NOT get deductions for miscellaneous itemized deductions on Schedule A of form 1040. The Tax Cuts and Jobs Act of Dec. 22, 2017 eliminated those deductions for individuals.

However, Trusts that are not Grantor Trusts for an individual still living (known as Non Grantor Trusts-Trusts for after the grantor’s death) and Estates are allowed to deduct miscellaneous itemized deductions on form 1041, Income Tax Return of Estates and Trusts.

The Estates and Trusts are required to list those deductions (expenses) in two categories: expenses that are reduced by 2% of the Adjusted Gross Income and expenses that are fully deductible (not reduced by 2% of Adjusted Gross Income).

The distinction is expenses incurred commonly or customarily by a hypothetical individual holding the same property are reduced by the 2% of Adjusted Gross Income. Examples are explained in IRS Regulation 1.67-4 and include normal ownership costs such as condo fees, insurance premiums, maintenance and lawn services, vehicle registration fees. That is meant to be expenses that the individual would pay if he or she were still living.

Expenses that are fully deductible by the Non Grantor Trusts (Trust operations after the death of the Grantor) include tax preparation fees of Gift and Estate Tax Returns (forms 709 and 706), Income Tax Returns of the Estate or Trust (form 1041) and the decedent’s final income tax returns. Also included are investment advisory fees greater than what a living person would incur and appraisal fees. Probate court fees, fiduciary bond premiums, legal publication costs of notices to creditors and heirs, cost of decedent’s death certificates and costs related to fiduciary accounts are also fully deductible on form 1041. The tax preparation fees of any state returns involved are also fully deductible.

So if you are in charge of settling an Estate or a Trust after the grantor’s death (known as Non Grantor Trusts) it is helpful to keep track of both kinds of expenses.

There is still one other adjustment to consider. If the Estate or Trust has tax free municipal bond interest then only a part of the expenses are allowed. The deduction is reduced by a ratio of tax exempt interest divided by total gross income.

The IRS instructions for each tax form are also helpful in determining what kind of expense was paid.

Did you hear “I’m not confused, I’m just well-mixed.” Robert Frost, Poet

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