If you have paid expenses that are considered various deductions, you can claim them from your taxes by entering them on Schedule A (Form 1040). To do this, you must record the expenses as «Other miscellaneous deductions,» and the total amount of all such deductions must be greater than 2% of your adjusted gross income. Beneficiaries of a trust or estate have restrictions on the tax deductions they can claim on their tax returns. The terms of termination of an estate or trust for tax deduction purposes are still under review by the IRS. Examples of non-deductible estate planning services for tax return purposes include: It`s also not bad to check with a tax advisor which legal expenses are tax deductible. Rental property costs such as fees paid for the eviction of a tenant According to IRS Publication 529, legal fees for certain specialized estate planning services may fall into the category of miscellaneous deductions for tax return purposes. Depending on your situation, your lawyer may advise you to create a trust as part of your estate plan. Many estate planning lawyers have an assistant or small department to help you transfer assets to the trust, but not all lawyers do this. At the very least, they should be able to give you detailed written instructions on how to transfer assets to the trust. However, the process can be complex and overwhelming, so it`s best if they can actually help you through the process. Categories of legal fees eligible for deduction: Let`s briefly review the basics.
Most consulting, tax preparation and other fees are classified as various individual deductions. Prior to TCJA, these expenses were deductible for an individual to the extent that they exceeded 2% of adjusted gross income. Trusts have the same rule, but are given a special break for expenses paid or incurred in connection with the administration of the trust that would not have come into being if the trust`s assets had instead been held by an individual. Best of all, these costs don`t have a lower limit of 2% and are fully deductible from the first dollar. So when are the costs in the first category (not deductible for individuals under the TCJA and also for trusts) and when are the costs in the second category (still fully deductible for trusts)? Some estate planning expenses were allowed as individual deductions under IRS rules for various Schedule A deductions, but the Tax Reductions and Jobs Act changed that — at least for now. The IRS discusses various deductions in Publication 529. Estate planning fees, including all other legal fees, fall into the «Miscellaneous» category. If the deceased has established a trust, his or her representatives may make an IRC election under section 645 to have the trust and estate income tax return filed as a federal income tax return and not separately. However, with the introduction of the Tax Cuts and Jobs Act (TCJA), various deductions will be suspended until 2026. Some estate planning expenses may still be tax deductible if they fall into certain categories. Kegler Brown will continue to monitor developments around the release of the final rules and their impact on individual deductions for trusts and estates.
The expenses you pay for setting up a revocable trust are generally considered personal expenses that are not tax deductible. However, if you have received tax or tax planning advice in relation to the trust, or if the trust contains provisions for the production or collection of income from property included in the trust, you may be able to deduct some of the expenses. The Internal Revenue Service considers these deductions valid and can be claimed as various individual deductions. Various deductions Prior to the coming into force of the TCJA, individuals, trusts and estates were allowed to deduct certain expenses described in section 67 of the Internal Revenue Code (IRC) to the extent that the sum of those expenses exceeded 2% of the person`s, trust`s or estate`s adjusted gross income. Under these rules, the administrative costs of an estate or trust, which would normally be subject to this 2% limit, were fully deductible as long as they were paid or incurred in connection with the administration of the estate or trust, and would not have been accrued if the assets had not been held in the trust or estate. Some attorneys` fees are eligible for a tax deduction, but it all depends on the type of legal services you need, as many attorneys` fees are considered personal expenses. As a general rule, attorneys` fees for estate planning are not tax deductible. However, there are exceptions, which we will explain in more detail. Under the proposed rules, excess deductions will be allocated in accordance with § 652 IRC. Under this regulation, $2,000 in property taxes is allocated to $2,000 in rental income. Let us also assume that the executor, at his discretion permitted by the regulations, will allocate $4,500 in deductions from IRC § 67(e) to the remaining $4,500 of income. Therefore, the excess deductions at the end of the estate are $11,000, or $9,500 at IRC § 67(e) deductions (deductible in computing gross income) and $1,500 in individual deductions (deductions not 2%).
Beneficiary A will be allocated $7,125 in deductions above the line and $1,125 in individual deductions, and Beneficiary B will receive $2,375 in deductions above the line and $375 in individual deductions. Your lawyer can inform you about services related to taxes or the administration of income-generating activities, such as legal advice about your business. Until recently, the IRS allowed attorneys` fees for estate tax planning services to be tax deductible if they had been incurred for the production or collection of income; the maintenance, preservation or management of income-generating assets or tax or planning advice. The proposed rules Confirm that the administrative costs of a trust or estate are not considered to be different individual deductions subject to the 2% restriction; and are therefore always deductible. In addition, the proposed rules provide that excess deductions – expenses that exceed the income of a trust or estate and are passed on to beneficiaries on a final tax return – retain the character of specific expenses. This means that a portion of the excess deduction may be a deductible administrative expense in computing adjusted gross income, an individual non-diversified deduction that is not subject to the 2% limit, or any other individual deduction subject to the 2% restriction. The nature and amount of excess deductions are determined by dividing the deductions between the income of the trust or estate in accordance with IRC § 652. Before claiming the deduction on your tax return, ask your lawyer or financial planner for a detailed list of your fees. Invoicing should break down fees into parts related to personal, tax and income-generating matters. While tax advice is generally easy to define, it`s not always clear what counts as an income-generating expense, so you may want to consult a qualified tax professional if you want to claim this deduction. You can report deductible amounts as miscellaneous expenses in Schedule A.
However, you can only deduct the portion of other expenses that exceeds 2% of your adjusted gross income. The following list contains only a few examples of the different types of deductions mentioned above, but does not claim to be exhaustive. Executors and trustees should contact a lawyer for specific advice on their clear tax returns: The proposed Regulations confirm that estates and non-settling trusts will be granted the following deductions under paragraph 67(e): Conclusion Although the proposed rules provide much-needed clarification on the deductions that are still permitted for trusts and estates, there are still some that have not been answered. Issues that the final rules can address when they are finally published. Please contact your HBK advisor to discuss the impact these proposed regulations may have on your tax situation. To claim deductions from attorneys` fees on your tax return, you will need your lawyer`s invoices that clearly indicate the tax-deductible services. You can receive multiple invoices depending on the time your file takes. Your lawyer must indicate which part of the services he provides is deductible. While the TCJA has increased the tax on trusts in some cases, the final settlement has provided important clarifications, reminding trustees and others that there are still expenses that can be deducted from trusts. What is certification? Estate is the legal process used to transfer assets to their heirs after the death of a loved one. Amy Dalen, JD Amy is a Director and Chair of the Tax Advisory Group at HBK CPAs & Consultants.
Tax Advisory Group is a group of highly specialized professionals who provide tax training to our team members, monitor compliance with tax policies to mitigate business risks, and provide tax planning and consulting services to our clients. Amy specializes in estate tax, gifts, trustees, individuals and not-for-profit organizations. Your lawyer will provide a range of services in the construction and administration of your estate. As we mentioned earlier, some of these services are tax deductible, others are not.
