Missives

The new limit on itemized deductions for those in high income tax brackets applies to estates and trusts. While a 2/37th reduction in deductible expenses does not seem like it is too big an impediment, when the expenses are large enough, especially with estate administration expenses, the loss of itemized deductions can be punitive.

A lot more planning in the years to come will include the use of non-grantor trusts to save income and capital gain taxes. At the same time, we can expect the IRS to assert more often IRC 643(f) so as to treat multiple non-grantor trusts as a single trust.

OBBBA provided a ‘mixed bag’ when it comes to philanthropy. It provides some incentives to charity giving, e.g., the opportunity for an above-the-line deduction for nonitemizers, but it also adds new floors, limits, and exclusions that will complicate planning and require greater attention to detail by donors and their advisors.

A recent missive summarized Trump Accounts created under the One Big Beautiful Bill Act, or OBBBA. As a quick refresher, a Trump Account can be created for a child who is born between 2025 and 2028. Up to $5,000 can be contributed to the Trump Account each year. If such an account is opened, the U.S. government will contribute $1,000 to it. In addition, employers can also contribute to that account, up to $2,500 annually, and that contribution will not be treated as taxable income to the employee.

Gambling losses just became even more costly under the One Big Beautiful Bill Act. This change complicates an already burdensome tracking process. Will this change provide new motivation to misreport or bypass official avenues of reporting? Will some gamblers now have an incentive to gamble at unlicensed international sites where there is minimal oversight and safeguards. This is just one of the many unintended consequences of the rushed-through OBBBA that we will watch be played out in the year(s) to come.

Now permanent applicable exclusion amount of $15 million per individual, new income tax deductions that can be phased out if the individual reports too large adjusted gross income, or the desire to shift income using non-grantor trusts for descendants in lower marginal income tax brackets, and a renewed focus on exposing trust assets to a basis step-up on the death of a surviving spouse.

The new Tax Bill did not directly make any changes to IRAs and other retirement plans, but it indirectly creates more incentives to save for retirement and to convert traditional IRAs to Roth IRAs.

The difference in the OBBBA limit on tips and overtime compensation for single individuals, but not married individuals, may be unintentional, considering the fact the phase-in limit language is identical for these two OBBBA deductions. The House version of the OBBBA bill did not include any limit at all, so that language was added (someone has reported, in secret) in the Senate’s version of the bill. Was this difference intended by the Senate, or the House, or anybody who took the time to read the bill before voting on it? This marriage penalty -or- marriage bonus interpretation is probably just a small glitch that can be clarified in the Proposed Regulations.

Most folks who will qualify to claim this new auto loan interest deduction will probably not have $10,000 of interest expense a year. Also, the phaseout level starts at low amounts for individuals who are likely to be able to afford a new car. And as mentioned, given the price differential between new and used cars, the tax-savings of deducting loan interest will probably not be enough to justify purchasing a new car just to claim the interest deduction.

With new estate planning strategies seemingly appearing each month, a settlor should be able to choose the governing law for any aspect of his/her trust. Hopefully, with a new, model conflicts-of-law act and Restatement on the horizon a more streamlined approach will exist to reduce future conflict-of-law situations when dealing with trusts.