Recent IRS Announcements: Inflation-Adjustments, Trust Deductions, and Anti-Clawback Proposed Regulations

Written by Jim Worthington on December 1, 2018

The IRS has recently issued three significant updates. They include a Revenue Procedure, a Notice, and Proposed Regulations.

The first, Rev. Proc. 2018-57, released Nov. 15, 2018, provides the inflation-adjusted numbers for various tax exemptions, limits, etc. Four major ones for trusts and estates matters include:

  • The annual gift tax exclusion remains at $15,000. For more about the annual exclusion, see this article.
  • The annual gift tax exemption for gifts to a non-citizen spouse increases to $155,000. For more about gifts to non-citizen spouses, see this article.
  • The lifetime applicable exclusion amount increases to $11,400,000. For more about the lifetime exclusion, see this article.
  • Trusts pay income tax at the highest 37% marginal rate on trust income exceeding $12,750.

The second, Notice 2018-61, effective July 13, 2018, clarifies the impact of the 2017 Tax Act’s repeal of the miscellaneous itemized deduction. Trusts, like individuals, may no longer deduct investment management fees. Trusts, however, may continue to deduct trustee fees, appraisal fees, and other fees not “commonly or customarily” incurred by individuals. The IRS promised to issue regulations more fully explaining the rules. However, the repeal of the itemized deduction will expire starting January 1, 2026, so it should act quickly.

The third, REG-106706-18, published in the Federal Register on November 23, 2018 (83 Fed. Reg. 59343), is a little more complicated and involves the feared clawback effect of the planned reduction in 2026 of the applicable exclusion amount to $5 million plus the inflation adjustment. A troubling question has been whether the estate of a person who made, for example, an $11 million gift in 2024 when that was protected by the applicable exclusion amount and then died in 2026 when the applicable exclusion amount was much less would have to pay tax on the part of the gift in excess of the lower applicable exclusion amount. The Proposed Regulations basically answer that question “no.”

As with any situation involving taxes, if you have a question about a specific set of facts, you should consult a qualified tax professional who can apply the law to your particular facts.