FISCAL YEAR 1041 EXCESS DED

[TAXMAN]

Someone check me on this. Final 1041 fiscal year beginning in 2017 ending in 2018 has excess deductions on termination. Passes this to bene. who can then deduct these in 2018 on sch A line 16.

I read that they can even though the year began in 2017. Thanks for the help.

[EricF]

Unfortunately, Tax Reform seems to knock this deduction out because it is a miscellaneous deduction subject to 2% of AGI per IRS Publication 529, and all such deductions are disallowed on Schedule A.

The IRS is planning to issue regulations on this matter, and they asked for comments from the public in Notice 2018-61.  Part of that Notice is excerpted here:

The section 642(h)(2) excess deduction may include expenses described in section 67(e). As previously discussed, prior to enactment of section 67(g), miscellaneous itemized deductions were allowed subject to the restrictions contained in 8 section 67(a). For the years in which section 67(g) is effective, miscellaneous itemized deductions are not permitted, and that appears to include the section 642(h)(2) excess deduction. The Treasury Department and the IRS are studying whether section 67(e) deductions, as well as other deductions that would not be subject to the limitations imposed by sections 67(a) and (g) in the hands of the trust or estate, should continue to be treated as miscellaneous itemized deductions when they are included as a section 642(h)(2) excess deduction. Taxpayers should note that section 67(e) provides that appropriate adjustments shall be made in the application of part I of subchapter J of chapter 1 of the Code to take into account the provisions of section 67.

The Treasury Department and the IRS intend to issue regulations in this area and request comments regarding the effect of section 67(g) on the ability of the beneficiary to deduct amounts comprising the section 642(h)(2) excess deduction upon the termination of a trust or estate in light of sections 642(h) and 1.642(h)-2(a). In particular, the Treasury Department and the IRS request comments concerning whether the separate amounts comprising the section 642(h)(2) excess deduction, such as any amounts that are section 67(e) deductions, should be separately analyzed when applying section 67.  (Emphasis underlined.)

[TKTax]

My client's 1041  k-1 shows these excess deductions. When I enter them in the k-1 input on line 11, they show as a schedule E loss in column (f).  I had to override the k-1 continuation page. 

They also show up on Schedule A for the state.

[TAXMAN]

Any one know if there has been any action on this. With the standards being so high I doubt many TP's will benefit.

[SaraEA]

On 1/23/2019 at 11:01 AM, EricF said:

Taxpayers should note that section 67(e) provides that appropriate adjustments shall be made in the application of part I of subchapter J of chapter 1 of the Code to take into account the provisions of section 67.

Yes, I think I will boldface that quote and imbed it in the letter that goes to the executors of all the estates I do this year.  They will be so impressed that they won't notice the lost deduction.

Taxman, see the instructions for Line 16.  Excess deductions on termination are not on the list of allowable entries.  Because the FY ends in 2018,  expenses go on the beneficiaries' 2018 returns, which have no place for them anymore.  Interesting that IRS is considering this though.  You might want to put this return on extension to see what happens (if the Bs agree).