Tax Reform Primer – Miscellaneous Deductions

Take-Away: Pretty much all of the prior miscellaneous income tax deductions that individual taxpayers took advantage of disappeared with last week’s Tax Act. They cease to exist as deductions beginning in 2018.

What Deductions are Disappearing?

• Tax Preparation Fees: Accounting fees for tax return preparation are no longer deductible.
• Tax Advice Fees: Fees incurred for tax advice given by accountants and attorneys are no longer deductible.
• Unused Capital Losses: In the past unused capital losses held by an estate or a trust would be passed-through to the estate or trust’s beneficiaries when the estate or trust terminated. The pass-through of those capital losses ends beginning in  2018, and the beneficiaries will not be able to take advantage of those capital losses- they just disappear, unused.

What Deduction Remains? Because it is not a ‘miscellaneous deduction’, the deduction under IRC 691(c) is still available to taxpayers. This is the income tax deduction for federal estate taxes previously paid on income in respect of decedent items, e.g. deferred compensation, IRAs, 401(k) accounts,  that the taxpayer inherited. This deduction is intended to avoid double taxation of the same asset. The beneficiary who inherits the income in respect of decedent asset is able to claim an income tax deduction for the federal estate taxes paid with regard to that inherited asset.

With the loss of so many income tax deductions, far more taxpayers will use the standard deduction [$12,000 single taxpayers; $24,000 married taxpayers filing jointly] which is the primary simplification that Congress promised us.