What Expenses Can an Estate or Trust Deduct on a 1041 Fiduciary Return?
Form 1041 has nine lines for the different things trusts and estates can deduct—interest; taxes; fiduciary fees; charitable; attorney, accountant, and return preparer fees; other deductions; income distribution; estate tax; and qualified business income. Notably, "other deductions" opens the door to anything else allowed under the law. The IRS gives some guidance in the instructions, but it's always better to confirm what the law actually says.
Recent Statutory History
26 USC § 212 allows deductions "for the management, conservation, or maintenance of property held for the production of income". 26 CFR § 1.212-1(h) expands this for estates and trusts so long as they are "are ordinary and necessary in connection with the performance of the duties of administration, … notwithstanding that the estate or trust is not engaged in a trade or business". These are itemized deductions though, as they are not above-the-line to where they affect adjusted gross income per 26 USC § 63(d). 26 USC § 67(b) further designates them as miscellaneous itemized deductions. TCJA suspended miscellaneous itemized deductions and OBBBA made it permanent in 26 USC § 67(h). Therefore, in general every deduction is disallowed for estates and trusts unless listed in 26 USC § 67(b) or 26 USC § 67(e).
Current Law
26 USC § 67(e) saves some deductions by moving them above the line if they "are paid or incurred in connection with the administration of the estate or trust and which would not have been incurred if the property were not held in such trust or estate", in addition to saving the personal exemption and distribution deductions.
So, assuming an estate isn't running a business, you can only deduct expenses you wouldn't have incurred if the estate or trust weren't established.
Examples
Some examples of deductible expenses typically created by being in an estate or trust:
- Fiduciary fees and mileage
- Attorney fees relating to the administration
- Court fees
- Tax preparation fees
- Appraisal fees
- Newspaper publication fees
- Certain bank fees
- Postage
Some examples of estate expenses that used to be deductible subject to 2% of AGI but now are not deductible at all:
- Utilities
- Home insurance
- HOA fees
- Repairs
- Lawn care
- Car insurance
- Car registration
- Investment advisor fees
- Attorney fees over a boundary dispute, personal injury, or wrongful death
And other things like funeral expenses or medical bills were never deductible, even under the old rules.
However certain other things may be otherwise deductible, often on their separate lines or schedules, like mentioned at the beginning. State and local taxes are still deductible under 26 USC § 164. Rental and business expenses are still deductible under 26 USC § 162. Repairs and improvements can still be added to bases or depreciated. Interest can still be deductible under 26 USC § 163.