Now that you have read Part 1 of this article, regarding how your distribution from an estate could have resulted in an excess deduction, your next question might be, "How do I take the deduction?" You are in the right place. In Part 2 of this article, we’ll go over how to determine the amount that qualifies for the excess deduction and where to properly report it on your Form 1040.
What Is My Excess Deduction Amount?
If you received a distribution from an estate, you likely also received a Form K-1. This is the tax form that details any taxable income or deductions that you then report on your individual income tax return.
For tax years 2018 and 2019, you would see the excess deductions reported on that K-1 from the estate under Box 11 – Code A. Sounds easy, right? Unfortunately, no. In order to properly deduct on your 1040, you’ll need further detail on what makes up those excess deductions.
Not all deductions are created equal. Some deductions can be taken against ordinary income, while other deductions can only be taken as an itemized deduction, subject to limitations. Excess deductions can be made up of all types of deductions, so it’s important to know the type of deduction makes up that excess deduction from the fiduciary income tax return and report same type of expense on your Form 1040. For example, if the excess deduction was from state taxes paid, the deduction remains a state taxes paid deduction. This is important because state taxes are subject to a $10,000 SALT limit on your individual tax return and require that you itemize your deductions in order to take. However, if your excess deduction was an estate administration fee, such as accounting or attorney fees, it would be an ordinary deduction that you could deduct against your income without itemizing.
How Do I Know What Type of Excess Deduction I Have?
For tax years 2018-2019, you will likely need to go back to the Executor of the estate and request the breakout of the expense--as it was not required to be broken out on Form K-1. If the Executor is unsure of the breakdown, they should be able to easily go back to their accountants and obtain that information for you.
Starting in the 2020 tax year, the Form K-1 has added additional codes to more easily identify what type of excess deduction you have:
Box 11, Code A: Deductions reported under code A are deductions that are considered section 67(e) expenses. This is just a complicated way of saying estate administration expenses (such as attorney fees, accounting fees, fiduciary fees and court costs). Fortunately, you are not responsible for making the determination of which expenses qualify as section 67(e) expenses--you just need to know that if reported in Box 11 Code A in 2020, you get to take a full deduction on your tax return!
Box 11, Code B: Deductions reported under Code B are deductions that are considered itemized deductions. These are deductions that you would take on Schedule A, which includes items such as state taxes paid, real estate taxes, mortgage interest, etc. Your Form K-1 should include a statement detailing the attributes of these deductions.
How Do I Report on My Individual Income Tax Return?
Now that you know the amounts and attributes of the excess deductions, you’re ready to report on your Form 1040. If you are lucky enough to have estate administration expenses (reported Box 11A on your Form K-1 in 2020), you can report the full amount under Schedule 1, Part II, Line 22. Be sure to write in the following description: “ ED67(e)” per IRS instructions.
If your excess deduction is an itemized deduction (reported Box 11B on your Form K-1 in 2020), you would report like you would any other regular itemized deduction that you have on Schedule A. For example, if your excess deduction was state taxes paid, you would report as state taxes paid under Schedule A, Line 5a – State and local taxes. And as mentioned before, they would also be limited to the $10,000 SALT deduction, just like any other state taxes you paid. Keep in mind too, that you only want to itemize deductions if the deduction you get after completing Schedule A is larger than the standard deduction available. For 2020, the standard deduction is $12,400 and $24,800 for single and joint filers, respectively. So, if your excess deduction in this category is only $100, it is probably not worth going through the steps if you were not already itemizing.
Also keep in mind that the 2018 and 2019 tax year filing dates are over, but it’s not too late to amend.
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