New IRS Regulations Regarding Fiduciary Expenses

If you are involved in any way with a trust or estate which is required to file Form 1041, U.S. Income Tax Return for Estates and Trusts, you may be interested in a change in the way these entities compute their tax.

The Internal Revenue Service, in final regulations issued in 2014, clarifies issues such as: fees paid to an investment advisor by a nongrantor trust or estate are generally miscellaneous itemized deductions subject to a floor of 2% of adjusted gross income, as is the case for individuals filing Form 1040. Other types of costs which would be subject to the 2% limitation if paid by an individual taxpayer will be required to be so treated by a trust or estate.

Fiduciaries (for the most part trustees or administrators and executors of estates) will be required to separate the amount of their “bundled” fees—in other words, “unbundle” them into the portion which is attributable to investment advice, and the portion which is not. The investment advice portion will be included with any other costs subject to the 2% limitation, and the rest will be fully deductible, except for:

  • Payments made to a third party out of the bundled fee that would have been subject to the 2% floor if paid directly by the trust or estate, and
  • Separately assessed expenses in addition to usual or basic fees or commissions, that are commonly or customarily incurred by an individual

The regulations also allow the use of any reasonable method to make the allocation to investment advice, and include a listing of the facts that may be considered in determining whether an allocation is reasonable.

While the final regulations initially called for the “unbundling” rule to be effective for tax years beginning on or after May 9, 2014, they have delayed its effective date to cover tax years beginning on or after December 31, 2014. This was in response to comment which indicated that insufficient time was given to allow fiduciaries to implement changes.

While this rule will largely affect corporate or professional fiduciaries, it is required by any individual trustee of a non-grantor trust, and any other fiduciary, such as the executor of an estate.

In addition to the “fee unbundling” rules, the regulations clarify several other matter of interest to fiduciaries of trusts and estates, specifically costs are subject to the 2% floor to the extent the cost is (1) included in the definition of miscellaneous itemized deductions; (2) incurred by an estate or nongrantor trust; and (3) commonly incurred by a hypothetical individual holding the same property. Some examples are:

  • Appraisal fees other than for determining the value of assets (1) as of a decedent’s date of death, or the alternate valuation date. (2) for making distributions, (3) as required to prepare tax returns or a generation-skipping transfer tax return.
  • Costs incurred to defend a claim against the estate, decedent, or nongrantor trust that are unrelated to the estate’s or trust’s existence, validity, or administration.

If these new regulations may impact you, be sure to contact Potts & Company for more information and details specific to your situation.


Obamacare Forms are Here

Or, more accurately, many of them which will be used in implementing the new law were announced recently in draft form. And as it develops, there are quite a few. Here’s a sampling:

Form 1094-B the form for Transmittal of Health Coverage Information Returns

Form 1094-C the form for Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns

Form 1095-A a form for the Health Insurance Marketplace Statement

Form 1095-B the Health Coverage Form

Form 1095-C a form for Employer-Provided Health Insurance Offer and Coverage

OK, enough already! This is a few of several forms which were issued along with several “Revenue Procedures” (an IRS official method of telling us how to properly do something to their liking) related to the Affordable Health Care Act.

Among these is Revenue Procedure 2014-37, which “provides the methodology to determine the applicable percentage table in Section 36(b)(3)(A) of the Internal Revenue Code used to calculate an individual’s premium assistance credit amount for taxable years beginning after calendar year 2014. It also provides the methodology to determine the required contribution percentage in Section 36(c)(2)(C)(i)(II) used to determine whether an individual is eligible for affordable employer-sponsored minimum essential coverage for purposes of Section 36B for plan years beginning after calendar year 2014. In addition, Revenue Procedure 2014-37 reproduces the required contribution percentage, as determined under guidance issued by the Department of Health and Human Services, used to determine whether an individual is eligible for an exemption from the individual shared responsibility payment because of a lack of affordable minimum essential coverage under Section 5000A(1)(A) for plan years beginning after calendar year 2014. [i]

As you can see, or if you’ve been keeping up, already knew, we have a few more forms in our future.

Not to scare you, but we will be bringing you more fascinating news about the Affordable Care Act and its implications for you.





[i] Analysis from Jon A. Hayes, Executive Director, Independent Accountants Association of Michigan. 

Taxes “Easy to Pay?”

Not your grandfather’s way of settling up!

Coming up with the money to pay the IRS may never get easier, but after many years of paying taxes to the IRS by mail (and receiving refunds from the IRS in the form of Treasury checks in brown envelopes), the IRS enabled the deposit of refunds directly into your bank account several years ago. While some people prefer their refunds by paper check (for reasons tax accountants rarely understand), most people are now receiving their refund, if they have one coming, by direct deposit.

Well, the IRS has now figured out the other side of the coin, so to speak: how to pay the IRS. It has announced the start of its new web-based system, IRS Direct Pay which allows taxpayers to pay their tax bills or make estimated tax payments directly from checking or savings accounts without any fees or pre-registration.

New IRS Commissioner John Koskinen says: “IRS Direct Pay simplifies the payment process, and taxpayers can make a payment from the convenience of a home computer.”