Author Archives: Liz Timko

Choosing the best way to reimburse employee travel expenses

If your employees incur work-related travel expenses, you can better attract and retain the best talent by reimbursing these expenses. But to secure tax-advantaged treatment for your business and your employees, it’s critical to comply with IRS rules.

Reasons to reimburse

While unreimbursed work-related travel expenses generally are deductible on a taxpayer’s individual tax return (subject to a 50% limit for meals and entertainment) as a miscellaneous itemized deduction, many employees won’t be able to benefit from the deduction. Why?

It’s likely that some of your employees don’t itemize. Even those who do may not have enough miscellaneous itemized expenses to exceed the 2% of adjusted gross income floor. And only expenses in excess of the floor can actually be deducted.

On the other hand, reimbursements can provide tax benefits to both your business and the employee. Your business can deduct the reimbursements (also subject to a 50% limit for meals and entertainment), and they’re excluded from the employee’s taxable income — provided that the expenses are legitimate business expenses and the reimbursements comply with IRS rules. Compliance can be accomplished by using either the per diem method or an accountable plan.

Per diem method

The per diem method is simple: Instead of tracking each individual’s actual expenses, you use IRS tables to determine reimbursements for lodging, meals and incidental expenses, or just for meals and incidental expenses. (If you don’t go with the per diem method for lodging, you’ll need receipts to substantiate those expenses.)

The IRS per diem tables list localities here and abroad. They reflect seasonal cost variations as well as the varying costs of the locales themselves — so London’s rates will be higher than Little Rock’s. An even simpler option is to apply the “high-low” per diem method within the continental United States to reimburse employees up to $282 a day for high-cost localities and $189 for other localities.

You must be extremely careful to pay employees no more than the appropriate per diem amount. The IRS imposes heavy penalties on businesses that routinely fail to do so.

Accountable plan

An accountable plan is a formal arrangement to advance, reimburse or provide allowances for business expenses. To qualify as “accountable,” your plan must meet the following criteria:

  • It must pay expenses that would otherwise be deductible by the employee.
  • Payments must be for “ordinary and necessary” business expenses.
  • Employees must substantiate these expenses — including amounts, times and places — ideally at least monthly.
  • Employees must return any advances or allowances they can’t substantiate within a reasonable time, typically 120 days.

If you fail to meet these conditions, the IRS will treat your plan as nonaccountable, transforming all reimbursements into wages taxable to the employee, subject to income taxes (employee) and employment taxes (employer and employee).

Whether you have questions about which reimbursement option is right for your business or the additional rules and limits that apply to each, contact us. We’d be pleased to help.

©2017

AICPA ISSUES NEW TRUST SERVICES PRINCIPLES

The AICPA recently issued new Trust Services Principles (TSP Section 100) in April 2016 which supersedes the previous version issued in 2014. The most significant changes to the TSP include the following:

Restructures and creates a new set of privacy criteria that is incorporated as part of the common criteria method of assessment and reporting. As such, privacy principles is now consolidated into a more concise set of additional criteria for privacy that is to be reported as part of the common criteria report instead of a separate report for Generally Accepted Private Principles.

Revised Appendix B, “Illustration of Risks and Controls for Sample Entity” to include additional privacy criteria and examples of risks that may prevent the privacy criteria from being met as well as controls designed to address those risks.

Modified criteria CC3.1 and CC3.2 to specifically require the need to address potential threats including those arising from the use of vendors and other third parties providing goods and services. This also includes threats from customer personnel and others with access to the system.

Eliminated CC3.3, it was merged into CC3.1 and CC3.2 for redundancy.

Two new confidential requirements (C1.7 and C1.8) were introduced to address the retention and disposal of confidential information.

The new trust services principles and criteria are effective for periods ending on or after December 15, 2016, with early implementation permitted. You can also see the full guidance for purchase through the AICPA website.

Bill Long

Feel free to contact Bill Long with your questions.
wlong@norrislong.com
(941) 284-1380

TAKING CONTROL OF THE FINAL FORM 1040

Because they don’t encounter them often, many tax practitioners are hesitant to prepare a decedent’s final Form 1040, U.S. Individual Income Tax Return. Often, the most that tax practitioners do differently from a return for a living client is to determine who can sign the return on the decedent’s behalf.

But it is better to take control of the situation and make the final Form 1040 a powerful and effective part of the post-mortem planning process. Practitioners should aim to stride confidently into the final Form 1040 preparation and come out of it with tax savings for the decedent’s family.

Here are some things I have learned about tax planning and preparation during a quarter century of helping clients after the loss of a loved one.

Stop making estimated tax payments

Once a taxpayer dies, he or she is no longer required to make estimated tax payments. Many well-meaning family members continue to submit the decedent’s quarterly estimated tax vouchers, which is not necessary and may require taking funds out of an investment portfolio, where they could otherwise be growing and earning income for as long as a year.

Not only does Regs. Sec. 1.6654-2(e)(7) indicate no joint estimated tax payments can be made after death and the estate has no liability to make further payments, it makes practical sense that no payments are needed, too. The decedent’s tax year ends on the date of death, so only income received through that date is reportable on the final Form 1040. If the deceased taxpayer was paying an amount each quarter to cover the expected tax liability for that quarter, he or she would no longer need to make those payments after the tax year ends. (Note, however, that the surviving spouse may need to make estimated payments for his or her own tax liability.)

Even if the deceased taxpayer was taking advantage of the prior-year-tax safe harbor in making estimated tax payments and the Form 1040 ends up with a balance due later on, the tax preparer can eliminate filing the Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts.

Who will sign the return? What if there is a refund?

A surviving spouse filing a joint return need not do anything special. He or she will just sign as the surviving spouse. If someone other than a surviving spouse has been appointed by a court to administer the decedent’s affairs, that executor or personal representative should sign the return and attach a copy of the certificate that shows the official appointment.

If the return shows an overpayment of tax, and it is not a joint return with the surviving spouse, or there is no court-appointed executor or personal representative, Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer, will need to be filed with the return to obtain a refund.

Can a spouse file a joint return with a decedent?

Yes, a surviving spouse can file a joint return with the decedent for the year of death. Depending on the relative earnings of each spouse, the joint tax rate tables may yield the greatest benefit.

However, if the decedent incurred significant medical expenses during his or her last illness and passed away early enough in the year to be reporting substantially less income, consider filing separately if it would save tax by allowing medical expenses to exceed the adjusted gross income threshold for deduction and create a better overall result for the surviving spouse and family.

Savings bond interest is normally taxable to the beneficiary of the bond

This is one of my favorite post-mortem planning strategies. Savings bonds were particularly popular among what is now the older generation among us. Many decedents have bonds that have accrued interest rolled into them when earlier issues of bonds were converted to later issues, and many types of bonds accrue interest until maturity. That accrued interest, which usually has never been taxed, will be taxed when the beneficiary of the bond cashes it.

But there is an important exception that allows accrued bond interest to be reported on the decedent’s final Form 1040, using a Sec. 454(a) election, which often saves tax over what the child beneficiaries’ marginal tax rate would be if they reported all the interest when cashing the bonds.

This takes some coordination of reporting. First, all the interest accrued through the decedent’s date of death is reported on the decedent’s final Form 1040. After that, the beneficiaries should cash the bonds. The beneficiaries will receive Forms 1099-INT, Interest Income, for the interest they receive, which may be more than the interest already reported by the decedent if interest continues to accrue on the bonds.

The beneficiaries should report the interest on their personal returns, to avoid a matching notice from the IRS. On the next line of their Schedule B, Interest and Ordinary Dividends, the beneficiaries should deduct it as a negative income item with an explanation that the interest has already been reported by the decedent (and including the decedent’s Social Security number) under a Sec. 454(a) election. The bonds should be cashed as soon as possible because, if they are cashed five or 10 years after the decedent’s death, it will be easy to lose track of the fact that the accrued interest through the date of death has already been reported and taxed.

If the decedent is the beneficiary of the bond, all the better. When preparing the Form 1041, U.S. Income Tax Return for Estates and Trusts, the tax practitioner can control the process of reporting the bond interest. The estate reaches the highest federal tax rate, 39.6%, plus 3.8% net investment income tax, when taxable income exceeds $12,400 in 2016. But the decedent’s final Form 1040 may be at a very low tax rate, depending on how much bond interest there is, so the family can often save a lot of tax by reporting the bond interest on the final Form 1040.

Allocation of income between pre- and post-death reporting

On a loved one’s date of death, most family members do not obtain a federal identification number for the estate, call all the brokers to open new accounts that are titled in the estate’s name, and transfer his or her assets into those new accounts. And, of course, these things usually cannot be done immediately because the legal processes to appoint the executor or personal representative take some time. So the Forms 1099 for investment earnings for the year of death are often messy. They usually include activity that occurred after the date of death and may include sales of securities whose basis has not been adjusted to date-of-death values.

Thought should be given to allocating only the income earned prior to death to the decedent’s Form 1040. Any post-death earnings should be reported either on a Form 1041 for the estate or on the beneficiary’s return, if it is an asset that is titled to transfer immediately on death. Consider whether the post-death earnings will be reportable by a surviving spouse who is filing jointly with the decedent anyway. Think about whether moving this post-death income to Form 1041 will allow expenses incurred after death, or administrative expenses incurred by reason of the death, to offset this post-death income; and consider whether the cost to prepare the Form 1041 to use expenses to offset the income is justified.

Medical expenses

Medical expenses can be deducted on the final Form 1040 or as a debt on the federal estate return, Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, wherever the greatest benefit is derived. When they are deducted on Form 1040, any expense paid that year can be deducted, whether it was paid before or after death.

The medical expenses that are eligible for deduction on Form 706 are the ones paid only after the date of death. Medical expenses cannot be deducted on Form 1041.

Federal estate tax is generally not deductible, but state estate tax is deductible on the federal estate tax return

Neither federal nor state estate tax can be deducted on a federal income tax return. However, beneficiaries may be entitled to take an itemized deduction for the estate and generation-skipping transfer tax attributable to income in respect of a decedent (IRD) on their individual income tax returns for the year they include the IRD in income. Funeral expenses are also not deductible on an income tax return.

Is federal income tax deductible?

Yes. Amounts owed on a final income tax return are deductible as a debt on the estate return, Form 706. (On the other hand, income tax refunds are taxable to the estate as accounts receivable.)

This is one reason to think about a deathbed conversion to a Roth IRA. If the tax on converting the IRA reduces the size of a federally taxable estate and results in less income tax to the beneficiaries when they take withdrawals, that is truly a winning combination. Just cashing the IRA completely before the end of life can be worthwhile, but the beneficiaries would lose the tax-free growth of the account balance that could occur over their single life expectancies.

Think about taking big IRA withdrawals if someone is near death early enough in the year that his or her income will be very low and much of the IRA withdrawal would fall into lower tax brackets. Or take that large IRA withdrawal just to get the amount of the resultant federal income tax either to reduce the assets in the estate at the date of death or to be a deductible debt of the estate, which results in the same lower figure.

Extend the final Form 1040 to facilitate post-mortem planning

The federal estate tax return, Form 706, is due nine months after the date of death.

The estate income tax return, Form 1041, can use a fiscal year end that can be as late as the last day of the month that falls in the following year before the month of death. (For example, a date of death of Aug. 25, 2015, can have a fiscal year that runs to as late July 31, 2016.) Form 1041 is due the 15th day of the fourth month after the end of the tax year.

It is often preferable to extend the final Form 1040 to coordinate the preparation of these returns in such a way that every angle can be considered. The Form 1040 is still due April 15th, even when the taxpayer passes away during the year, and an automatic six-month extension can be obtained by filing Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. Taking the extension provides more flexibility to determine where things will be reported to obtain the lowest overall tax for the family.

Use those capital losses

The decedent’s capital loss carryover evaporates if it is not used as part of the final Form 1040. It does not pass over to the surviving spouse or other beneficiaries. This is an opportunity for the surviving spouse to dispose of enough of his or her own appreciated stock to fully use the other spouse’s remaining capital loss carryover, but the last chance to do that is the year of death. The surviving spouse can then immediately repurchase the same stocks, as the wash-sale rules do not apply to gains.

Any stocks a surviving spouse inherits are not likely to be much help in recognizing capital gains, as they will have received a step-up in basis to their value at the date of death.

What about suspended passive losses?

If the decedent had any suspended passive losses, either generated in or carried forward to the year of death, those losses may be able to be deducted on the final Form 1040. Passive losses in excess of the amount of basis step-up received on the asset that generated the passive losses can be deducted on the final Form 1040.

Conclusion

Having a dear client pass away is difficult. But knowing the tools to enable the client’s family to receive excellent professional care in winding up the deceased client’s tax affairs is very gratifying. Being there for clients when they need you most is why I continue to practice as a CPA.

Karen Cohen, CPA, MBA, is a Principal with Packer Thomas, specializing in personal income tax planning and trust, estate, and gift tax planning and compliance.  This article was published in the AICPA’s newsletter “Tax Insider” on January 14, 2016.

Feel free to contact Karen with questions.
kcohen@packerthomas.com
1-800-943-4278
(330) 533-9777

NEWLY-PERMANENT TAX PROVISIONS

path-act For the past several years, taxpayers have had to wait until the last minute to know if certain tax provisions were going to be extended.  On December 18, 2015, the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) was enacted. This new law made permanent a number of provisions that had previously been on a year-to-year basis.  Included in the tax breaks that are now permanently in the law are:

  • American Opportunity Credit for certain education expenses ($2,500 per year for four years)
  • Educator’s deduction of $250 per year
  • The deduction of state and local income taxes
  • Tax-free distributions to charities from IRA accounts (limited to those age 70½ or older)

Taxpayers who stand to benefit from these and other provisions of the new law will now be able to plan ahead. Jerry Dreier Manager – Packer Thomas Feel free to contact Jerry with your questions:  jdreier@packerthomas.com (800) 943-4278 (330) 533-9777

IDENTITY THEFT & FRAUDULENT RETURNS

Tax Return FraudIf you have been a victim of identity theft and have discovered that a fraudulent return was filed and accepted by the IRS using your name and Social Security Number, it is now possible to request a redacted copy of the fraudulent return from the IRS.  This will help victims determine what information was stolen.  Instructions for requesting a copy of a fraudulent return can be found at https://www.irs.gov/Individuals/Instructions-for-Requesting-Copy-of-Fraudulent-Returns.

Jerry Dreier
Manager – Packer Thomas
Feel free to contact Jerry with your questions:  jdreier@packerthomas.com
(800) 943-4278
(330) 533-9777

OHIO INCOME TAX CHANGES

OhioThe Ohio income tax form will have a new look for the 2015 year (i.e. the return filed in 2016 covering the 2015 year).  There will just be one form, the IT 1040, that will cover what was previously handled by three separate forms (the IT 1040, IT 1040EZ, and IT 1040X).  In addition, there will just be one Schedule of Credits that will encompass credits previously claimed on Schedules B, C, D, and E of the previous year IT 1040.  There are a number of other changes in the Ohio return, including changes in the calculation of the Business Income Deduction.  Be alert!

Jerry Dreier
Manager – Packer Thomas
Feel free to contact Jerry with your questions:  jdreier@packerthomas.com
(800) 943-4278
(330) 533-9777

IRA TAX TRAP

Tax TrapWhen individuals invest IRA funds in partnerships, they will owe tax on certain partnership income exceeding $1,000.  When this tax applies, it almost always catches the IRA owner by surprise.  This tax is known as Unrelated Business Income Tax.  A recent article in The Wall Street Journal highlighted this potential tax trap.

The IRA trustee is responsible for preparing Form 990-T to calculate the tax but the IRA owner is generally responsible for ensuring that the tax is paid.  To avoid this complexity and cost, IRA owners should consult with their investment advisor about any publicly traded partnerships already owned by their IRA and consider making these types of investments in non-IRA accounts in the future.

Jerry Dreier
Manager – Packer Thomas
Feel free to contact Jerry with your questions:  jdreier@packerthomas.com
(800) 943-4278
(330) 533-9777

Risk Management in a Mobile World

SmartphoneIntroduction

Mobile devices are rapidly becoming the primary end-user computing platform at area companies. The broad user-experience, computing capabilities, and always-on connectivity combined make mobile devices very compelling PC replacements.  However, this shift to mobile computing represents a challenge to existing secure IT environments.  IT management must consider new approaches to securing corporate data and minimizing risk when so many new variables are introduced.  “How do these mobile devices expose our company?” is a common question.  Because organizations want to take a mobile first approach, many employees and managers are enjoying resulting benefits which include efficiency, competitive differentiation and heightened innovation.  Finally, every new approach needs to be evaluated for new risks and benefits, so let’s take a minute to survey this new landscape of risk/benefit.

Going Mobile

Consider the two key reasons why IT needs to adopt new strategies for securing corporate data on mobile, as compared to PCs, when pursuing a strategy to heighten user productivity.

Reduced IT control over mobile devices: The mobile era is all about the end user. They get to pick a mobile platform that best meets their personal preferences, with the expectation that the device should also work in a business context for the full range of apps and content needed to stay productive. This is in stark contrast from the PC era where IT offered end-users an approved PC with a set of pre-selected apps. End-users had very limited say on what the PC was able to access and IT had the ability to control every aspect of the corporate-owned device from physical ports, to software and application versions. For mobile, end-users make the decision for many of these variables and IT can only recommend devices and applications. IT has no way to enforce a standard OS, device or app across the organization.  In fact, the more IT tries to lock down devices, the more end-users will try to by-pass policies, increasing risk to the organization.

Old security models must adapt to stay relevant: In the PC operating system scenario, the agent-based security method worked well. This involved a piece of software residing on the PC that controlled the process and data belonging to other applications. Unfortunately, this agent-based security model cannot be used to secure Mobile because of the differences in the way these operating systems are designed. Mobile operating systems are designed using a sandboxed architecture which enables for isolation of apps and associated data which can only interact and share data through very well-defined mechanisms. This allows for greater security than the open-file system used by PC OS, and needs new tools that leverage specific security capabilities made available by the device vendor itself.

Threats to Mobility

As trends such as the use of Mobile devices to enhance enterprise productivity, organizations are being exposed to a variety of information security risks and threats. Threats introduced by mobile can be grouped in to three categories:

Device based threat vectors

Mobile devices enable end-users to perform a variety of business-related tasks such as receiving email and accessing, editing and sharing corporate content via a variety of productivity apps. As a result, mobile devices store a significant amount of sensitive data. This data can be compromised in a variety of ways due to:

  • Always-on connectivity which could allow unauthorized parties to access business data.
  • Software that allows “jailbreak” or “rooting” of devices, compromising data security.
  • Portability making the devices susceptible to theft and misplacement.

Network based threat vectors

The always-on model requires mobile devices to be constantly connected to the internet. As a result, end-users might rely on untrusted public networks enabling malicious parties to access and intercept transmitted data using

  • Rouge access points
  • Wi-Fi sniffing tools
  • Sophisticated Man-in-the-Middle attacks

User based threat vectors

Mobile empowers end-users. While this is great for user-choice, well-meaning end-users often indulge in risky behaviors that could compromise business data. Examples of risky behaviors include:

  • Using un-approved cloud-based apps to share and sync data
  • Using un-approved productivity apps that maintain copies of corporate data
  • Jail breaking/ rooting devices to bypass security controls
  • Using malicious apps from un-approved app-stores
  • Exposing business data with malicious intent

While one may argue that the list of threat vectors introduced by Mobile devices are similar to those introduced by laptops and similar portable PC-based devices, the fundamental differences between Mobile and PC operating systems require IT to adopt purpose-built Enterprise Mobility Platforms to mitigate risks introduced by Mobile.

Countermeasures for New Risks

Implementing data loss prevention on mobile devices requires a layered security approach. This layered security approach can be implemented using the controls listed below:

1) Secure operating system

2) Strong Authentication

3) Remote wipe

4) Device Encryption

5) Data sharing

6) Network security

7) Application lifecycle management

8) Secure browsing

Below are descriptions of the data loss prevention requirements and specific controls.  Each class of controls can include basic controls, which directly address the requirements, supplemental controls, which strengthen the basic controls, and compensating controls, which apply when no basic control is available. These layered security controls, together, establish a data loss prevention model for Mobile.

Secure operating system

Secure applications to prevent malware from accessing application data – Configure apps to access data only when essential.

Provide a safe application ecosystem – Stores such as Google Play and the Apple App Store are tightly curated to minimize the likelihood of malware in posted apps. Apple prohibits certain backdoors, like the download of new, executable code into an already approved app. Apps can also be immediately revoked from app stores if they are later found to break to violate policies.  Add additional tools to ensure malware is minimized.

Patch OS vulnerabilities quickly – Ensure devices are configured to automatically update as patches are released.

Strong Authentication

Remotely configure password policy

Auto-wipe device after a certain number of failed authentication attempts

Enforce identity for enterprise services

Remote wipe

For company-owned devices, remotely wipe all the data on the device

For employee-owned devices, remotely wipe ONLY if enterprise data is the device

Encryption

Encrypt all enterprise data-at-rest on the device

Encrypt all enterprise data-in-motion to and from the device

Encrypt all enterprise data in secure apps

Data sharing

For corporate email in the native email app:

  • Do not allow attachments to be opened in an unauthorized app
  • Do not allow forwarding through a personal email account
  • Do not allow copy/paste, printing, or screenshots of email text
  • Do not allow backup of email outside IT control

For corporate apps:

  • Do not allow app data to be accessed by unauthorized apps
  • Do not allow copy/paste, printing, or screenshots of app data
  • Do not allow backup of app data outside IT control

Network security

Prevent data loss as enterprise data traffic travels through public cellular and Wi-Fi networks outside IT control.  VPN: For companies that have standardized on device-wide VPN technology from vendors like Cisco and Juniper, the VPN service should be configured to provide a secure channel for data.

Application lifecycle management

Prevent rogue apps from being downloaded to device

Blacklist unauthorized apps

Whitelist authorized apps

Publish and distribute enterprise apps

Update enterprise apps

Secure browsing

Allow secure access to enterprise web apps located behind the firewall

Prevent data loss of downloaded documents and cached web content

Protect against “drive by” malware browser attacks

Conclusion

The pressure to support new mobile operating systems will be a constant challenge for IT departments because operating system and device choice are now determined by the consumer, not by the enterprise, and can change frequently.  Mobile operating systems such as Android and iOS as an enterprise mobility management (EMM) platform have matured to provide the layered security controls enterprise requires to mitigate the risk of data loss on both corporate-owned and personally-owned devices.   As a result of these controls, organizations can now support the new generation of mobile operating systems and devices that their user communities demand.

Feel free to contact Jeff Sheets or Bill Long with your questions about mobile device security.

jsheets@packerthomas.com

wlong@packerthomas.com

(800) 943-4278
(330) 533-9777

My 2%’s Worth

two percentAny time I review an estate or trust income tax return, Form 1041, I pause on Line 15.  That’s the spot where a decision must be made to subject “Other deductions” to the 2% of income floor or to take full advantage of those deductions.

When I arrive at Line 15 I have already fully deducted, legitimately, several items that individuals would not be able to fully deduct on their personal returns.  For example, fiduciary fees, attorney fees, accounting fees, and return preparation fees are all fully deductible on Form 1041, but not on Form 1040.  On Form 1040, they would be subject to a 2% of adjusted gross income floor.

It is not surprising that I pause on Line 15.  This has been an unsettled area of the tax law for the past 28 years.  A lot of court cases have looked at the expenses being deducted there and compared them to the expenses incurred by individuals for the same services.  The cases have concluded that the fees are fully deductible if they were only incurred because the property is held in a trust or estate. If the fees could have been incurred by individuals owning the same type of property, the expenses are subject to the 2% floor.

This is illogical and inconsistent.  Welcome to the world of tax law.  It is just like the world of parenting, where we were often told, “You will do it that way because I said so.”

The vast majority of the expenses under scrutiny are normally labeled investment fees.  Well, we finally have final regulations about what to do with those fees, effective for tax years beginning on or after May 9, 2014.  That would include a decedent whose date of death is on or after that date.  On calendar 2015 returns, we will handle the five types of costs discussed in the regulations as follows:

1.  Ownership costs. Any costs incurred simply by owning the property will be subject to the 2% floor.   For example, these include: condominium fees, insurance premiums, maintenance and lawn service, and miscellaneous itemized deductions from passthrough entities.

2.  Tax preparation fees. Continuing to be fully deductible are the preparation of estate and GST tax returns, fiduciary income tax returns (the Form 1041), and the decedent’s final individual income tax return.

Bizarrely omitted from full deductibility is any other type of tax return, including the decedent’s final gift tax returns and final Form 114, Report of Foreign Bank and Financial Accounts.  In other words, all other return preparation costs are subject to the 2% floor.

3.  Appraisal fees. These are fully deductible by an estate or trust if incurred for determining the value of assets of a decedent’s estate; determining distributions, such as a unitrust payment; or preparing tax returns. All other appraisals are subject to the 2% floor.

4.  Fiduciary expenses. These costs to administer an estate, such as probate court costs, surety bond premiums, publishing legal notices, cost of death certificates, etc., are fully deductible.

5.  Investment advisory fees. This is usually the largest expense on Form 1041. It is now officially limited by the 2% floor. Banks and trust companies are allowed to break out the portion of their fees that relate to fiduciary, legal, and accounting fees. If broken out for you, you can fully deduct fiduciary, legal, and accounting fees.

In the years leading up the final regulations, we were at various times told we could fully deduct investment fees and could not fully deduct investment fees.  As we tend to be consistent from year to year on tax returns, we will have to be vigilant to adopt the final regulations when preparing Form 1041.

The final regulations are fairly consistent with the proposed regulations that were issued for this in 2011.  So, for 2013 and 2014 returns and beyond, we should be limiting pure investment fees to the 2% floor.

Karen S. Cohen, CPA
Principal – Packer Thomas
Feel free to contact Karen with your questions: kcohen@packerthomas.com
(800) 943-4278
(330) 533-9777