Pub. 2 2020 Issue 6

13 nebraska society of cpas W W W . N E S C P A . O R G Sharon Kreider, CPA has helped more than 15,000 California tax preparers annually get ready for tax season for the past 19 years. With a keen ability to demystify complex individual and business tax legislation, Kreider instructs Western CPE tax seminars and presents regularly for the AICPA, the California Society of Enrolled Agents, and A.G. Edwards. She gained her detailed, hands-on tax knowledge through her extremely busy, high-income tax practice in Silicon Valley. Mary Kay Foss, CPA specializes in handling complex trusts and individual tax planning. She goes above and beyond the compliance work to understand the personal issues faced by her clients and how they affect retirement planning and trust administration and funding. In addition, she teaches classes for CPAs and other financial professionals about retirement planning and estate planning. Foss has 30-plus years of public accounting experience, providing planning and tax preparation services for complex estates, trusts, and individuals. She also works closely with fiduciaries to assist with trust funding and reporting to beneficiaries. For more information, contact Western CPE’s customer service center at (800) 822-4194 or wcpe@westerncpe.com. ©2020 Mary Kay Foss & Sharon Kreider Now is the time to go through your client list to see if any 2018 returns should be amended to claim excess deductions. Returns for 2019 can reflect the new rules or be amended if previously submitted. Tax Practitioner Planning. When the IRS was asked during the 2018 tax filing season how to handle the conf lict between the Schedule K-1 instructions and the Schedule A instructions, they said, “We’re working on it.” Existing Regs. Regulations for unused loss carryovers and excess deductions (§642(h)) were last updated in 1978. The examples date back to 1960 when neither the 2% limitation nor the passive loss rules were in the tax law. The existing regulations specify that the excess deductions are itemized deductions and are “not allowed in computing adjusted gross income.” Proposed Regulations Clarify Two Items Administrat ion expenses. Proposed regu lat ions (see REG-113295-18 at ht tps://www.federal register.gov/ documents/2020/05/11/2020-09801/effect-of-section-67g-on- trusts-and-estates) clarify that the following deductions allowed to an estate or non-grantor trust are not miscellaneous itemized deductions subject to the 2% of AGI limitation: • Costs paid or incurred in connectionwith the administration of an estate or non-grantor trust that would not have been incurred if the property were not held in the estate or trust are still deductible. These expenses include legal, accounting, and other administration costs specific to the estate or non-grantor trust. • IRS will continue to consider expenses listed in §67(b) and §67(e) as not miscellaneous itemized deductions. They are instead deductible in arriving at the AGI of an estate or non-grantor trust. The deduction of those expenses is not affected by new §67(g), which provides for the suspension of the deductibility of certain miscellaneous itemized deductions for taxable years beginning after December 31, 2017, and before January 1, 2026. Excess deductions. The proposed regulat ions issue guidance on determining the character, amount, and allocation of deductions over gross income succeeded by a beneficiary on the termination of an estate or non-grantor trust. These proposed regulations affect estates, non-grantor trusts (including the portion of an electing small business trust), and their beneficiaries. During the final year of an estate or of a non-grantor trust, some of the excess deductions are deducted in arriving at AGI (above the line) and not from AGI (below the line). The §642 proposed regulations (which can be relied on for years beginning after December 31, 2017) divide excess deductions into three categories: 1. deductions allowed in arriving at adjusted gross income, 2. non-miscellaneous itemized deductions, and 3. miscellaneous itemized deductions. Note. The beneficiary that is allocated the deductions will be subject to any applicable limitations on their return. For example, the state and local tax (SALT) limitations may apply to the beneficiary. Example. In an example from the proposed regulations, a residuary benef iciary can claim excess deductions on their individual income tax return as a deduction in arriving at the beneficiary’s AGI. Assume that a trust distributes all its assets to B and terminates on December 31, Year X. As of that date, it has excess deductions of $18,000, all characterized as allowable in arriving at adjusted gross income under Internal Revenue Code Section 67(e). B, who reports on the calendar year basis, could claim the $18,000 as a deduction allowable in arriving at B’s adjusted gross income for Year X. However, if the deduction (when added to B’s other deductions) exceeds B’s gross income, the excess may not be carried over to any year after Year X. Tax Practitioner Planning. One of the two examples in the proposed regulations is f lawed because it treats property taxes on a rental as an itemized deduction instead of directly allocated to rental income. The example was an update of an example from 1960, which referred to §642(h) regulations in effect then. Proposed Regulations Are Very Favorable Now is the time to go through your client list to see if any 2018 returns should be amended to claim excess deductions. Returns for 2019 can ref lect the new rules or be amended if previously submitted. If you are amending a 2018 or 2019 return, you may need more information from the trustee or tax preparer to break down the excess expenses into the three categories specified in the regulations. t