Final regulations determine deductions for trusts and estates after the TCJA.

• Author: Bonner, Paul
• Position: Tax Cuts and Jobs Act of 2017

The IRS on Sept. 21 issued final regulations (TD. 9918) clarifying that certain expenses incurred by, and certain excess deductions upon the termination of, an estate or nongrantor trust are not affected by the suspension of miscellaneous itemized deductions for tax years 2018 through 2025. The regulations also provide guidance on determining the character, amount, and allocation of excess deductions that are succeeded to by beneficiaries.

The final regulations adopt with few changes proposed regulations issued in May 2020 (REG-113295-18; see also Schreiber, "Trusts and Estates Are Permitted Certain Deductions," The Tax Adviser (May 8, 2020), available at tinyurl.com/y4uxby4m).

Sec. 67(g), enacted by the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, disallows miscellaneous itemized deductions for any tax year beginning after Dec. 31, 2017, and before Jan. 1, 2026. Before the TCJA, miscellaneous itemized deductions were allowed to the extent that their aggregate amount exceeded 2% of adjusted gross income (AGI). Miscellaneous itemized deductions are defined as itemized deductions other than those listed under Secs. 67(b)(1) through (12).

Sec. 67(e) directs that the AGI of an estate or trust is computed in the same manner as for an individual, except that deductions are allowed for (1) costs paid or incurred in connection with the administration of the estate or trust that would not have been incurred if the property were not held in an estate or trust, and (2) deductions allowable under Sec. 642(b) (personal exemption amounts for estates and trusts) and Secs. 651 and 661 (distributions by trusts distributing current income and trusts accumulating income, respectively).

In Notice 2018-61 issued in July 2018, the IRS announced it would issue regulations to clarify that...