“Lost Deductions” and the Impact on Trusts

by Chris Hardman, CPA, senior tax manager and member of Hellam Varon’s Estate and Trust Group

You have likely heard about the many dramatic changes to the tax law that will impact your 2018 tax filings. Some of the best-publicized of those changes involve the limitation or total disallowance of deductions for expenses you’ve been able to claim for years, including a $10,000 cap on taxes, a reduced cap on mortgage interest, and the disallowance of “miscellaneous itemized deductions.” This latter category includes professional and investment advisory fees.

On your personal return, reduced tax rates will mitigate the effects of these lost deductions to some extent, but the impact will be much greater for trusts. Professional and investment advisory fees represent one of the largest expenses each year for many trusts, so the loss of this deduction could substantially increase taxable income for such trusts, and may result in additional tax payable for 2018.

Some trusts are required to distribute their entire net income to one or more beneficiaries each year. For many of these trusts, which in the past have typically only paid tax on their net capital gains, losing these deductions will have an unexpected side-effect. Now many trusts will actually have to pay tax on the undistributed portion of taxable income.

Trusts in this situation may wish to consider making additional beneficiary distributions to decrease the tax paid by the trust; and instead have that income taxed on the beneficiary’s individual return. In order to impact your 2018 tax return, any additional distributions must be made within the first 65 days of 2019 (i.e.: on or before March 5, 2019).

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Chris Hardman, CPA / Senior Tax Manager