August 23, 2018

The Tax Cuts and Jobs Act: Implications for Trust Taxation

In a bid to simplify the tax filing process, the 2017 “Tax Cuts and Jobs Act” (TCJA) significantly reduced a number of deductions previously allowed to individuals.  Although the TCJA does not appear to have any direct impact on trust taxation mechanics, the interconnectivity of individual and trust taxation necessitates a closer examination of how this reform may impact the future tax liability of a trust.

How will the latest tax law changes affect trusts?

Taxable income for trusts is computed in the same manner as for individuals, except where specifically provided otherwise in the Internal Revenue Code.  As such, the new tax law does impact trusts, changing the tax rate schedule and a significantly restricting allowable deductions. Changes to trust income taxation will revert after December 31, 2025, similar to individuals.

What are the changes to tax rates?

The TCJA reduced Federal tax rates for trusts but, as before, these rates increase quickly toward the highest tax bracket at a relatively low-income level. The preferential rates for qualified dividend income and long-term capital gains remain unchanged, and reach the maximum 23.8% once taxable income exceeds $12,500.

2018 Tax Rates 2017 Tax Rates
10% 0 to $2,550 15% 0 to $2,550
24% $2,550 to $9,150 25% $2,550 to $6,000
N/A 28% $6,000 to $9,150
35% $9,150 to $12,500 33% $9,150 to $12,500
37% Over $12,500 39.60% Over $12,500

 

Which deductions can be taken under the TCJA?

Administrative expenses incurred by the trust including trustee fees, legal fees and accounting fees may still be deductible if the underlying purpose of the expenses areis related to an income producing activity.

The TJCA also added a new deduction related to  qualified business income (IRC Section 199A). With some limitations, a trust is allowed a deduction of up to 20% of its domestic qualified business income.

Which deductions are no longer allowed under the TCJA?

The most significant change to the taxability of trusts is that the TCJA has eliminated many of the deductions allowed in previous years.  The following list contains a selection of the deductions that have been eliminated or restricted.

  1. Miscellaneous Itemized Deductions

The following deductions considered “miscellaneous itemized deductions ” are no longer deductible:

  • Investment advisory fees (unless for extraordinary expenses)
  • Appraisal fees (unless incurred in the taxation or administration of an estate or trust)
  • Property ownership costs (unless deductible as a trade or business expense)
  • Other miscellaneous deductions incurred for the production of income UNLESS these expenses are unique to an estate or trust
  • Miscellaneous itemized deductions from partnerships and S-corporations
  • Excess deductions of an estate or trust in its final year (these are treated as miscellaneous itemized deductions to the individual entitled to them)
  1. State and Local Tax Deductions

Trusts will be limited to a total state and local income tax and property tax deduction of up to $10,000.

We can help you.

As demonstrated above, these tax reforms will bear substantial consequences for trusts, their income, and their tax liabilities. These reforms will impact every trust return in a different manner. Careful, individualized planning is the only way to ensure that your trust will maximize the deductibility of all eligible expenses. Please contact us to discuss the impact of the TCJA stipulations on your trust.