As we recently explored, trusts & estates are fiduciary entities that have income tax requirements somewhat similar to corporations, partnerships, and other organized entities. Just like other income tax filers, deductions are available to trusts & estates that fiduciaries can utilize when filing the necessary Form 1041 for their trust or estate.
Exemptions & Deductions
The Tax Cuts & Jobs Act of 2017 upended many long-standing rules in federal income tax, notably the personal exemption. However, the exemption “sort-of” lives on in the context of trusts & estates. Estates are allowed a $600 exemption. Simple trusts are allowed a $300 exemption and all other trusts are allowed a $100 exemption.
Some common deductions available to trusts & estates as well are depreciation, interest expense, casualty losses, and even certain taxes paid. However, some deductions unique to trusts & estates and deductions need to be handled differently.
Exclusive Deductions
Trusts & Estates have a few unique deductions available to them. Utilizing them along with the other common deductions available to businesses and individuals can help potentially lower income taxes that he fiduciary entity may owe.
- Deduction for administrative expenses – Costs paid or incurred in connection with the administration of a trust or estate that would not have been incurred if the property were not held in the trust or estate.
- Distributions of taxable income to beneficiaries – The trust or estate receives a deduction for distributions made to beneficiaries. Limited to the distributable net income (DNI) of the trust or estate.
- Deduction for expenses allocated to tax-exempt income – tax-exempt income, such as certain death benefits or interest on state or municipal bonds, that may be subject to taxes or other business expenses are deductible to the trust or estate on the Form 1041.
- Schedule K-1 Depreciation – Depreciation from pass-through entities are a separately stated item included on the Form 1041 Schedule K-1. Fiduciaries must provide separate statements detailing the depreciation.
- Charitable contributions
- Treatment of charitable contributions from a trust or estate is a little different than if it were from an individual or corporation. Individuals have limits set on the deduction while trusts & estates generally do not have one. Additionally, estates are allowed a deduction for any gross income paid or set aside for charitable purposes while trusts can deduct up to the amount paid. Charitable recipients are not considered beneficiaries.
Trusts and Estates are unique legal entities with tax issues that are not commonly encountered. Grantors, beneficiaries, and administrators may need additional information or help in understanding and meeting their tax obligations. Fortunately, MiklosCPA has your back. We are a California-based accounting firm that has helped emerging businesses and specialized clients such as trusts and estates with their accounting and tax needs. Learn how we may help your organization by reaching out. Also, follow us on our social media pages for more tax tidbits and other “good to know” pieces for your business.