Effects of new tax law on trusts starting in 2018

The administrators of trusts in California have new tax codes to consider. The Tax Cuts and Jobs Act becomes largely effective in 2018 and brings changes to tax deductions for trusts.

As individuals have noticed, the tax reforms limit deductions for state and local taxes to $10,000. Because trusts calculate taxable income as if they were individuals, the deduction limit appears to be applicable to trusts as well. Trusts that contain business income from S-corporations, partnerships or sole proprietorships have a new 20 percent deduction as described in IRC Section 199A. The type of trust involved will determine the application of the deduction to the trust, estate or beneficiaries.

Questions have arisen about the influence of the new law on deductions for administrative expenses. Investment management fees under certain circumstances have lost their deductible status, but the new tax regulations do not directly address longstanding deductions for expenses like legal and accounting fees. Some tax preparers view IRC Section 67 (g) as granting deductions for expenses that are used to determine adjusted gross income.

The law also developed new tax brackets for trusts and estates. Seven brackets have been reduced to four brackets with taxation levels of 10 percent, 24 percent, 35 percent and 37 percent. The top rate begins to apply at $12,500 of taxable income.

A person charged with managing a trust might wish to discuss the effects of the new tax law with an attorney. Legal advice from someone familiar with trusts and trust administration may inform a person about changes to expect when filing taxes this year. An estate attorney might also advise a person who wants to set up a new trust or update an existing estate plan to take into account changes to the federal tax code.

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