Tax Alert
| Publication year | 2021 |
| Author | By Dennis I. Leonard, Esq.* |
By Dennis I. Leonard, Esq.*
This article provides a summary of select developments in federal and state taxation occurring since the last Quarterly that may be of interest to trust and estate attorneys.
The following annual, inflation-adjusted amounts will be effective for tax year 2021.
| Basic Estate & Gift Tax Exclusion | $11,700,000 |
| Gift Tax Annual Exclusion | $15,000 |
| Gift Tax Annual Exclusion for Non-US Citizen Spouse | $159,000 |
| Aggregate Decrease in a Decedent's Gross Estate | $1,190,000 |
| Estate Tax on Certain Business Interests | $1,590,000 |
| Income Tax Rates for Trusts and Estates | 10% for income not over $2,650 24% for income over $2,650 but not over $9,550 35% for income over $9,550 but not over $13,050 37% for income over $13,050 |
| Exemption for the Kiddie Tax | $1,100 |
| Standard Deduction for Married Couples Filing a Joint Income Tax Return | $25,100 |
| Amount Included in the Gross Income of a Covered Expatriate | $744,000 |
IRS/Treasury Priority Guidance Plan for 2020-2021 (Nov. 17, 2020)
The IRS Priority Guidance Plan is a signal to taxpayers regarding what projects the IRS plans to work on in the coming years (often new regulations or Revenue Procedures). The 2020-2021 Priority Guidance Plan includes several items of potential interest to trust and estate practitioners, including:
- Regulations clarifying the deductibility of certain expenses described in Internal Revenue Code ("IRC") sections 67(b) and 67(e) that are incurred by estates and non-grantor trusts;
- Regulations under IRC sections 162, 164, and 170, regarding the limited deductibility of more than $10,000 in state and local taxes and work arounds involving charitable gifts and taxes paid by flow-through entities;
- Final regulations under IRC sections 1014(f) and 6035, regarding basis consistency between estate and person acquiring property from decedent;
- Final regulations under IRC section 2642(g) describing the circumstances and procedures under which an extension of time will be granted to allocate generation-skipping transfer tax ("GST") exemption;
- Guidance under IRC section 4941, regarding a private foundation's investment in a partnership in which disqualified persons are also partners;
- Guidance regarding the excise taxes on donor advised funds and fund management;
- Guidance on basis of grantor trust assets at death under IRC section 1014;
- Guidance on user fee for estate tax closing letters under IRC section 2001 (which is new this year);
- Regulations under IRC section 2032(a), regarding imposition of restrictions on estate assets during the six-month alternate valuation period;
- Regulations under IRC section 2035, regarding personal guarantees and the application of present value concepts in determining the deductible amount of expenses and claims against the estate;
- Regulations under IRC section 7520, regarding the use of actuarial tables in valuing annuities, interests for life or terms of years, and remainder or reversionary interests;
- Final regulations under IRC section 72 on the exchange of property for an annuity contract; and
- Guidance under IRC sections 6039F, 6048, and 6677 on foreign trust reporting and reporting with respect to foreign gifts, and regulations under sections 643(i) and 679 relating to certain transactions between U.S. persons and foreign trusts.
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C. IRS Announces Proposed Regulations Validating Pass-Through Entity SALT Cap WorkaroundIRS Notice 2020-75 (Nov. 10, 2020)
Beginning in tax year 2018, IRC section 164(b)(6) caps individual taxpayers from deducting more than $10,000 per year of state and local taxes ($5,000 if married filing separately). In Notice 2020-75, the IRS announced it will issue proposed regulations clarifying the pass-through effect on individual owners when certain state and local taxes (known as "specified income tax payments") are paid directly by a partnership or S corporation.
In enacting IRC section 164(b)(6), Congress provided that a partnership or S corporation's payment of specified tax payments would continue to reduce the owner's distributive share of income or loss, consistent with pre-2018 law. Thus, the proposed regulations will have the following effects. First, a partnership or S corporation may expressly deduct specified income tax payments in computing each owner's distributive share of non-separately stated income or loss reported on a Form K-1. Second, the individual owner does not separately report their share of the deduction on their personal income tax return. Third, the benefit of the entity-level deduction is disregarded in computing the individual taxpayer's $10,000 cap on deducting state and local taxes on their personal income tax return.
The proposed regulations will apply to specified income tax payments made on or after November 9, 2020 but could apply sooner in some instances.
D. Final Regulations Clarify Estate and Trust Deductions Under IRC sections 67(g) and 642(h)TD 9918 (Oct. 19, 2020)
The IRS issued final regulations with two main impacts. First, the regulations clarify that, under IRC section 67(g), the following deductions are allowed by estates and non-grantor trusts without regard to the limits on miscellaneous itemized deductions:
1. Costs paid or incurred in connection with the administration of an estate or non-grantor trust, which would not have been incurred if the property were not held in the estate or trust;
2. The personal exemption of an estate or non-grantor trust;
3. The distribution deduction for trusts distributing current income; and
4. The distribution deduction for estates and trusts accumulating income.
In other words, the above-listed deductions are not affected by IRC section 67(g), which would otherwise suspend them as miscellaneous itemized deductions.
Second, the regulations provide that, under IRC section 642(h), if upon termination an estate or trust has deductions in its last taxable year (other than those allowed under section 642(b) or section 642(c)), which are in excess of gross income, then the excess deductions may be passed through to the beneficiaries succeeding to the property. This was an open issue/unanswered question in the world of fiduciary income tax, and the regulations offer welcome guidance.
Taxpayers may rely the new regulations for taxable years beginning after December 31, 2017.
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