As of five years ago, estate planning fees used to be tax deductible. Unfortunately, due to the Tax Cuts and Jobs Act of 2017 (TCJA), fees you pay for estate planning are no longer deductible from your taxable income.
However, changes to this Act will be up for renewal in 2025, so it may be that estate planning fees will be once again eligible for tax deduction in the near future.
Estate Planning Deductions Pre-2017 Tax Reform
Even before the TCAJ went into effect, not all estate planning fees were deductible. For example, property or guardianship transfers were not tax-deductible because the Internal Revenue Service (IRS) considered them personal expenses.
However, the IRS allowed certain estate planning fees eligible for itemized deductions under Schedule A (miscellaneous deductions) and, although with stringent limitations, being that you could only claim the portion that exceeded 2% of your adjusted gross income (AGI), some of the fees you could deduct included:
- The production or collection of income
- The management, conservation, or maintenance of any real estate property producing an income
- Tax advice and accounting
- Legal drafting of wills, trusts, powers of attorney, and other documents
It remains to be seen if these deductions, which were incentives for many, make a comeback in 2025.
Changes Under the Tax Cuts and Jobs Act (TCJA)
In 2018, the TCAJ went into effect, eliminating tax deductions for legal fees and fees paid for tax and investment advice provided on behalf of a living trust, as well as investment expenses and accounting costs
However, the IRS refers to these deductions as having been “suspended,” not terminated. Thus, given the TCJA has a definitive lifespan and is set to expire at the end of 2025, there is a possibility that these tax deductions will once again be available to taxpayers looking to make the most of their estate planning needs.
Will Estate Planning Fees Ever Be Tax Deductible Again?
Perhaps. The Tax Cut and Jobs Act took effect in 2018 and will remain in effect until the end of 2025, at which point Congress must decide whether to extend the Act or do away with it.
Whether estate planning fees can be deducted once again in the near future remains to be seen, nonetheless, taxpayers can still lower their tax liability for the 2022 tax year when it comes to estate tax. Talking with an experienced Orange County estate planning attorney that specializes in financial advising can help.
Tax Breaks Your Estate Can Claim
A tit for tat. Even though the TCJA suspended tax deductions for expenses resulting from estate planning, the TCJA contrastly improved the tax rules for estates which allows for deductions pertaining to administrative expenses incurred by the estate. These can include:
- attorney fees;
- accounting fees;
- property management fees; and
- commissions paid to the executor of your estate in exchange for their service.
Your executor will have the choice as to where (Form 1041 or Form 706) and how to claim these expenses, but in most states, you don’t have to file an estate tax return, thanks to the TCJA. Moreover, only the “wealthy” must pay estate taxes at the federal level. On average, 0.1% of the population pays estate tax.
The Unified Tax Credit
The Unified Tax Credit is referred to as “unified” because it covers both the value of your estate and any lifetime gifts you made to individuals or non-qualifying charities that exceeded the annual gift tax exclusion in the year you made them.
It works by setting a dollar amount that an estate can exempt from its taxable estate value. At which point, estates are only required to pay the federal estate tax on any portion of their value that exceeds this exemption amount.
When the TCJA went into effect, it more than doubled this exemption amount (that has been adjusted annually for inflation) from $5.49 million pre-TCJA to $12.06 million in 2022. Likewise, as to the suspension of the deductible estate planning fees, this doubled exemption is expected to expire with the TCJA after 2025.
The Unlimited Marital Deduction
The Unlimited Marital Deduction states gifts and post-death bequests made to your spouse are tax-free, provided your spouse is a U.S. citizen. Dollar limits only come into play if your spouse is not.
Is Estate Planning Still Worth It?
Yes! For one, some states impose an estate tax that proper estate planning can help you avoid! However, more importantly, if you do not leave an estate plan upon your death, your state will decide who will inherit your property, assets, and even cash, leaving you no voice for your wants and wishes beyond your death. Therefore, deduction or not, you most certainly may want to prioritize getting your estate planning done and out of the way.