Estate & Trust Administration For Dummies
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When filing Form 1040 or Form 1041 for a decedent, estate, or trust, you must determine how to deduct administration fees. Deductions for attorney, accountant, and preparer fees are limited on Schedule A of Form 1040. Report other miscellaneous itemized deductions on Form 1041. Many of these deductions will be subject to the 2 percent exclusion, where only amounts greater than 2 percent of adjusted gross income can be deducted.

Attorney, accountant, and preparer fees

Although Schedule A of Form 1040 limits deductibility for attorney, accountant, and return-preparer fees, Form 1041 allows you to fully deduct these fees. These fees are miscellaneous itemized deductions limited to amounts more than 2 percent of adjusted gross income.

If you have tax exempt income on question 1 of the “Other Information” section on the back of the 1041, you have to split the fees between taxable and tax-exempt income. You are only allowed to deduct the portion attributable to the taxable income. After you add your fees, and allocate when necessary, place your deduction on line 14 of Form 1041.

Miscellaneous itemized deductions: The 2 percent exclusion

If you’ve run out of specific categories but still have some things you suspect you can deduct, report them on lines 15a and 15b of Form 1041. Just like Schedule A of Form 1040, some of these miscellaneous itemized deductions are subject to the 2 percent exclusion, where only amounts greater than 2 percent of adjusted gross income are deductible.

Generally, expenses that are incurred only because this is an estate or trust are fully deductible, while fees that anyone in the position of looking after investments would pay are subject to the 2 percent exclusion.

Deductions not subject to the 2 percent exclusion

Report any items that are not subject to the 2 percent exclusion on line 15a of Form 1041. Any expense the trust or estate has incurred only because of its trust or estate status is deductible here.

So if you’re dealing with a law firm that charges for every copy and stamp it uses on your behalf, the deduction for miscellaneous costs goes here. So do filing fees for the probate court, publication costs for the newspaper ads ordered by the probate court, and the premium for surety bonds (a type of insurance policy indicating that you don’t intend to abscond with the funds).

Deductions subject to the 2 percent exclusion

Line 15b of Form 1041 is the place for all other miscellaneous deductions: investment advice, safe deposit box rentals, service charges on dividend reinvestment plans, and travel expenses. Payments to obtain duplicate stock certificates go here. So do costs to purchase your own supplies (stationery, stamps, etc.).

You probably want to hire a tax professional to assist you if you have lots of deductions subject to the 2 percent floor. If you only have minor deductions here and you feel otherwise equal to the task of preparing the Form 1041, leaving those deductions off may be easier. The tax benefit will be far less than the cost to have the return professionally prepared.

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