Deductions

§67(e) and Reg. §1.67-4

• Section 67(e) treats as above-the-line the costs paid in connection with administration of the estate or trust that would not have been incurred if the property were not held in a trust or estate. The 2017 act’s suspension of miscellaneous itemized deductions (§67(g)) does not reach them (Notice 2018-61; Reg. §1.67-4 as amended by T.D. 9918). updated 2026 P.L. 119-21 made §67(g) permanent, so the distinction is permanent too.
• Fully deductible (Reg. §1.67-4(b)): fiduciary fees; probate court fees and costs; fiduciary bond premiums; legal publication costs for notices to creditors and heirs; certified copies of the death certificate; fiduciary accountings; tax preparation for the estate tax return, the GST return, the fiduciary return and the decedent’s final 1040; appraisals for date-of-death value, for distributions, or for the fiduciary’s own returns.
• Not deductible (they are miscellaneous itemized deductions): investment advisory fees of the kind an individual pays, unless an incremental charge is made solely because the client is a trust with an unusual investment objective (Knight v. Commissioner, 552 U.S. 181 (2008)); preparation of a gift tax return; appraisals for insurance; “ownership costs” — HOA dues, insurance, maintenance, lawn care, automobile registration — unless tied to a rental or business, where they go on Schedule E or C; defense of claims an individual would also face.
• Bundled fees (Reg. §1.67-4(c)): a corporate trustee’s single fee is split between the deductible fiduciary portion and the nondeductible investment advice by any reasonable method — the percentage of corpus under investment advice, what a third-party advisor would charge, or the share of the trustee’s time spent on investments (exam Q20). Amounts paid out of the bundle to third-party investment advisors, and separately assessed charges for individual-type services, are never deductible.
• On termination the unused §67(e) items pass to the beneficiaries above the line as K-1 box 11 code A — The Termination Year.

The §642(g) election

• Administration expenses and casualty losses may be deducted on the Form 706 under §§2053–2054 or on the Form 1041, not both. By default they belong to the 706. The executor elects the 1041 by filing a statement, in duplicate, that the items have not been and will not be claimed on the 706 — any time before the 1041’s statute closes. Item by item, or in part (Rev. Rul. 70-361). Irrevocable once filed, so wait if a 706 audit is possible.
• Exempt from the rule: deductions in respect of a decedent under §691(b) — the decedent’s own unpaid taxes, interest and business expenses — which go on both returns with no waiver.
• Selling expenses on estate property may be used as an offset against the amount realized on the sale instead of as a deduction; the same election covers them.
• With a $15 million exemption the 706 deduction is worth nothing to most estates; the 1041 deduction is worth up to 37%. Default to the 1041 and file the statement with the first 1041 that claims the items.

Taxes

• Deductible (§164): state and local income taxes; real property taxes; personal property taxes if ad valorem (Example 3.5 — $175 of a $200 vehicle registration based on value); GST tax on income distributions; foreign taxes if no credit is claimed.
• Never: federal income tax; federal or state estate tax; gift tax; state inheritance tax.
• The SALT cap applies to a trust or estate as it does to an individual: updated 2026 $40,400 for 2026, phasing down to $10,000 above $505,000 of modified AGI check. Property taxes on business, rental or farm property go on Schedule C, E or F outside the cap; state income tax is inside it whatever the activity (the course overstates the §212 exception). Sales tax may be elected in lieu of income tax, but there are no tables for fiduciaries.
• State income tax on the decedent’s final return paid by the estate, and property tax accrued at death and paid afterward: §691(b) deductions on both the 706 and the 1041.

Interest

• Tracing rules as for individuals (Reg. §1.163-8T — the course misprints it as 1.168-8T). Interest on a loan to pay estate tax is nondeductible personal interest; interest on estate tax deferred under §6166 for a closely held business is denied outright by §163(k) (the 1041 course lists it as deductible — wrong since 1998; the other course has it right). Interest on §6163 deferrals for reversionary and remainder interests remains deductible under §163(h)(2)(E).
• Qualified residence interest is deductible only if a beneficiary with a present or residuary interest uses the home as a qualified residence (§163(h)(4)(D)). The mortgage on the decedent’s empty house pending sale is personal interest, unless the house is rented, in which case Schedule E. That the decedent lived there is irrelevant (Study Question 7).
• Investment interest (§163(d); Form 4952) to the extent of net investment income. Qualified dividends and net long-term capital gain are not investment income unless the fiduciary elects under §163(d)(4)(B) to forgo the lower rate on them; corporate bond interest and non-materially-participating working-interest income are investment income without an election (exam Q18). Software defaults differ; check the election.
• §163(j) applies in principle but is rarely reached.

Fiduciary, attorney and accountant fees

• Fiduciary fees on line 12; attorney, accountant and return-preparer fees on line 14; both when paid (cash basis). Executor’s commissions need the §642(g) election if they could have gone on the 706.
• A non-professional family executor’s fee is ordinary income to her (Schedule 1, other income) but not self-employment income (Rev. Rul. 58-5), unless she runs the estate’s business or serves as a fiduciary regularly. A family member who waives the fee within a reasonable time has no income.

The charitable deduction, §642(c)

• Authorized by the governing instrument. A discretionary power to make charitable distributions is enough (Old Colony Trust, 301 U.S. 379 (1937)); a payment to a charity under a will-contest settlement counts (Rev. Rul. 55-122). No authorization, no deduction — there is no “individual” charitable deduction on a 1041.
• Paid from gross income. A trust that deeds appreciated land to charity gets nothing: course Example 3.6 — land worth $700,000 with a $300,000 basis given directly, deduction $0; sell it first and give the proceeds, $400,000 gain and a $400,000 deduction, net zero and the charity gets the same land’s value. Income recognized in an earlier year counts if it was never deducted. Principal for accounting purposes can be gross income for tax — an IRA distribution paid to an estate and then to a charity under the will qualifies. Nothing from tax-exempt income (Reg. §1.642(c)-3(b)).
• No percentage limit. The individual §170(b) ceilings and the 2026 0.5%-of-AGI floor for individuals do not apply check; only unrelated business income under §681 limits it.
• Prior-year election (Reg. §1.642(c)-1(b)): a payment made this year may be deducted last year by filing a statement with last year’s original or amended return before the due date (with extensions) of this year’s return; revocable until that date, irrevocable after.
• Set-asides. An estate, or a trust under a §645 election, may deduct amounts permanently set aside for charity even if not yet paid (§642(c)(2)) — but only if the possibility that the charity will not get the money is “so remote as to be negligible” (Reg. §1.642(c)-2(d)); a foreseeable will contest kills it (Estate of Belmont, 144 T.C. 84 (2015)). Ordinary trusts cannot set aside (pooled income funds excepted).
• Mechanics: Schedule A of the 1041; the charity gets no K-1 and the payment is not a §661 distribution (Rev. Rul. 68-667); the deduction is allocated ratably across all classes of DNI before other deductions (Reg. §1.643(a)-5); it cannot create or enlarge excess deductions on termination (O’Bryan, 75 T.C. 304); a charitable carryover does not pass to beneficiaries.

Depreciation, depletion and §179

• Apportionment. Estate: between the estate and the beneficiaries on the basis of the estate’s accounting income allocable to each, regardless of the will, with no reserve concept (Reg. §1.167(h)-1(c)). Trust: first to the trust up to any depreciation reserve the document or state law lets the trustee maintain; the remainder apportioned by accounting income (Reg. §1.167(h)-1(b)). Depreciation may be allocated to a beneficiary in excess of the income allocated to him (Rev. Rul. 74-530). The beneficiary’s share is K-1 box 9 and is taken against the rental income on his Schedule E; it is a “directly apportioned” deduction that does not reduce DNI.
• Depreciation reported by a pass-through on its K-1 is treated as the fiduciary’s own if the entity reports it separately.
• §179 is unavailable to any trust or estate (§179(d)(4)) — not deductible, not allocable, not limited; simply gone. When a partnership or S corporation with a fiduciary owner elects §179, the entity continues to depreciate the fiduciary’s share (Reg. §1.179-1(f)(3)).
• Bonus depreciation is available to a fiduciary — updated 2026 100% and permanent for property acquired after January 19, 2025 — but never on property acquired from a decedent, because its basis is set under §1014 (§168(k)(2)(E)(ii)). Inherited business assets restart depreciation at date-of-death value on the regular tables with a short first year.

Net operating losses, excess business losses and §199A

• A trust or estate may have an NOL (§642(d), §172), computed without the charitable or distribution deductions (Reg. §1.642(d)-1). No carryback (farm losses excepted), indefinite carryforward, 80%-of-taxable-income limit. A carryback, where allowed, recomputes DNI for the carryback year and requires amended K-1s (Rev. Rul. 61-20). The estate does not inherit the decedent’s NOL (Rev. Rul. 74-175).
• updated 2026 The excess business loss limit (§461(l)) applies to trusts and estates at the single-filer amount, $256,000 for 2026, and is permanent; the disallowed amount becomes an NOL carryover.
• §199A: the fiduciary computes QBI, W-2 wages and UBIA from its own businesses and its K-1s and allocates them between itself and the beneficiaries in proportion to DNI distributed and retained (Reg. §1.199A-6(d)). The deduction is on its own 1041 line; it does not reduce DNI or NIIT. The threshold is the single amount, $201,750 for 2026 updated 2026, tested at the trust level — the anti-abuse rule for multiple trusts with substantially the same grantors and beneficiaries (§643(f); Reg. §1.643(f)-1) is aimed at splitting income to multiply it.
• Expenses allocable to tax-exempt income (§265): direct expenses first; indirect administrative expenses by any reasonable method — the gross-income ratio (Pub. 550) is the default, an asset-value ratio has been upheld (Alt), a trustee’s termination fee is spread over the life of the trust rather than charged to the final year (Rev. Rul. 77-466). Attach the Reg. §1.265-1(d) statement. The course’s chapter 2 says administrative expenses are not allocated; chapter 3 and the regulation say they are. Chapter 3 is right.

Study questions 7–11

• SQ 7. Mortgage interest on the decedent’s residence: deductible by the estate only if a present or residuary beneficiary lives there, or the house is rented.
• SQ 8. The estate deducts the decedent’s final-return state income tax on both the 706 and the 1041; GST tax on income distributions is deductible; foreign taxes may be credited; state inheritance tax never.
• SQ 9. A charitable deduction requires authorization in the instrument; there is no 60% limit; the prior-year election exists; an estate’s set-aside needs a chance of non-payment so remote as to be negligible.
• SQ 10. A trust’s depreciation goes first to the reserve, then by accounting income.
• SQ 11. The $25,000 active rental allowance: estates for two years; trusts never.

Private reference, not client advice. Notes taken from two continuing-education courses: Form 1041: A Practical Guide (Hadges & Zollars, Thomson Reuters Checkpoint Learning, 10 hours, written on 2019 law) and Taxation of Trusts, Estates, and Decedents (DeScherer & Rodda, CeriFi, 2025 printing on 2024 law). Figures and rules brought current to 2026 in October 2026 (P.L. 119-21, Rev. Proc. 2025-32, T.D. 9918). Items tagged check are to be confirmed against primary sources before they are relied on.