This summer, the IRS issued interim regulations clarifying that excess deductions from a Trust or an Estate can pass out to beneficiaries. In the early fall, the IRS issued final regulations to the same effect. What does this mean for you?
History of Excess Deductions
The Trump administration passed the Tax Cuts and Jobs Acts (the “TCJA”) at the end of 2017. The TCJA prohibited individuals, estates, and non-grantor trusts from claiming miscellaneous deductions for any years beginning after December 31, 2017, and before January 1, 2026.
Before the passage of TCJA, Trusts and Estates could pass out excess deductions to their beneficiaries in the year the estate or trust terminated. The beneficiaries could then take such deductions on their personal tax returns as miscellaneous itemized deductions. After the passage of TCJA, it appeared that the new IRS section 67(g) prohibited such excess deductions as TCJA specifically disallowed 2 % miscellaneous itemized deductions incurred in tax years 2018-2025.
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