With the passing of the TCJA, sweeping changes were made to tax laws for various types of taxpayers. Trusts and estates were among those taxpayers affected.
For income tax purposes, trusts and estates are treated similarly to individuals. Therefore, some of the changes affecting individuals also apply to trusts and estates. These changes are:
• The number of tax brackets was reduced to four brackets from five;
• The tax rates for these brackets were reduced to 10%, 24%, 35% and 37% (previously the maximum tax rate was 39.6%);
• Trusts and estates have a maximum zero rate amount for capital gains of up to $2,650 in taxable income, a maximum 15% rate of up to $12,700 in taxable income, and a maximum 20% of over $12,700 in taxable income;
• Allowance of the Qualified Business Income deduction (QBI) – If a trust or estate has income from a trade or business, a deduction of up to 20% of the trade or business income may be allowed. There are restrictions on types of income the deduction is allowed for. (Generally, medical professionals are excluded along with other types of personal service entities.) There are also some limitations on the deduction relating to W-2 wages and unadjusted basis of the assets used in the trade or business. The calculation for the QBI deduction can be done at either the trust level (if no distributions of income are made) or the beneficiary level (if distributions of income are made).
• Suspension of deductions subject to a limitation of 2% of Adjusted Gross Income (AGI).
Some items that did not change for trusts and estates that may have for individuals are:
• Alternative minimum tax was not addressed for trusts and estates
• Net Investment Income Tax is still in place and unchanged
• Deductibility of expenses not subject to the 2% limitation of AGI. This can be significant for trusts and estates that pay investment advisory fees. The IRS has held that these fees will be allowed as a deduction without the 2% AGI limitation as long as the fee would not have been incurred if the taxpayer weren’t a trust or estate. (For individuals, no investment advisory fees are deductible.)
If you have a trust or estate and are unsure if the QBI deduction, investment advisory fee deduction and the new maximum capital gains rates have been or should be utilized, contact us for assistance.