IRS Announces Forthcoming Section 67(g) Clarifications

The 2017 Tax Cuts and Jobs Act introduced Internal Revenue Code Section 67(g), which temporarily disallows miscellaneous itemized deductions until Jan. 1, 2026. Some commentators expressed concerns that IRC Section 67(g)’s disallowance of itemized deductions would include certain expenses of trust and estate administration allowed under Section 67(e), while many commentators took the position that Section 67(g) wouldn’t have a bearing on these expenses. On July 13, 2018, the Internal Revenue Service and the Treasury Department issued Notice 2018-61, which confirms that Section 67(e) expenses remain deductible in determining the adjusted gross income of a non-grantor trust or estate during the taxable years to which Section 67(g) applies. The Notice also acknowledges a more complicated issue—whether a beneficiary may deduct Section 67(e) expenses on the termination of a non-grantor trust or estate pursuant to IRC Section 642(h)(2). The IRS and Treasury have announced that they intend to issue regulations pertaining to this issue as well and have requested comments.

Section 67(e) Expenses Aren’t Miscellaneous Itemized Deductions

Section 67(g) provides that “Notwithstanding subsection (a), no miscellaneous itemized deduction shall be allowed for any taxable year, beginning after December 31, 2017 and before January 1, 2026.”¹ Section 67(a) provides that miscellaneous itemized deductions are allowed only to the extent that they exceed a floor of 2 percent AGI. Itemized deductions are defined as those allowable other than: (1) deductions allowable in arriving at AGI, (2) the deduction of personal exemptions under IRC Section 151, and (3) the deduction provided in IRC Section 199A.² Miscellaneous itemized deductions are those itemized deductions other than those listed in Section 67(b).³ Among those deductions that aren’t listed in Section 67(b) are deductions for costs paid or incurred in the administration of an estate or a non-grantor trust that wouldn’t have been incurred if the property weren’t held in such estate or trust under Section 67(e). These costs can include certain tax preparation fees, appraisal fees and certain fiduciary expenses.⁴