Excess Deductions on Trust Termination

Posted by Lee Reams Sr., BSME, EA on

There has been some confusion related to the deductibility of excess deductions flowing through to beneficiaries from a trust on Form 1041-K1 upon termination of the trust. Prior to the passage of the TCJA excess deductions on the termination of a trust were included as part of the beneficiary’s tier 2 (subject to the 2% of AGI limitation) miscellaneous itemized deductions. However, TCJA suspended the deduction for tier 2 deductions for years 2018 through 2025, leading many to believe (1) that the pass-through expenses at termination were no longer deductible by the beneficiary and (2) they were no longer deductible on the 1041.

The IRS subsequently issued Notice 2018-61 notifying taxpayers that the IRS intended to issue regulations dealing with the issue and in the meantime the taxpayers could rely on guidance included in Notice 2018-61, which provides the following:

  • Excess deductions on termination of a 1041 flowing through to beneficiaries from a trust 1041-K1 are deductible on Schedule A. Enter the amount on line 16 – Other Deductions. 

See also the beneficiary instructions to 2018 Form1041-K1, box 11, which also direct that the beneficiary’s share of Code A excess deductions are deductible on line 16 of the beneficiary’s Schedule A.