Decoupling for Trusts and Estates and Other Disallowances Included in Last Minute Revisions to Budget Bill

On March 31^st  an agreement was announced on the FY 2020 Budget. We wrote about the tax related highlights of the budget proposal when it was released back in January. We also recently commented here about the mismatch between the treatment of itemized deductions for individuals versus trusts. Recent guidance from the Tax Department clarified that individuals could itemize deductions at the state level even if they took the standard deduction on their federal return and could take deductions for items disallowed at the federal level. Initially, this seemed to only apply to only individuals, and not trusts and estates.

As it turns out, there were some late additions to the budget deal. Included in these additions is a provision that decouples itemized deductions for an estate or trust or a beneficiary from the federal treatment. Specifically, it allows for the itemized deductions under Internal Revenue Code (“IRC”) Section 67 at the state level that are no longer allowed at the federal level after December 31, 2017, as amended by the Tax Cuts and Jobs Act (“TCJA”). This provision also applies retroactively beginning December 31, 2017. Essentially, this affords beneficiaries of estates or trusts the same treatment as individuals, resolving the mismatch we described here.

Before anyone gets too excited, the same section of the budget law also requires trusts and estates to add back into income the deduction under Section 199A of the IRC. This will require the beneficiaries to include this addition on their own personal New York returns. In other words, New York has exchanged one mismatch (the itemized deductions) between trusts and individuals for another (the 199A deduction). The provision is effective retroactively, which means that the 199A deduction amounts should be included on taxpayers’ returns that are due in just 2 weeks on April 15^th.

If you haven’t filed yet, you or your accountant might have some revisions to make!

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