Is an Anomaly in Form 8960 Resulting in an Unintended Tax on Tax-Exempt Income?

By Michele Schlereth, CPA, J.D., MST, and Matthew E. Rappaport, Esq., LL.M.

 Photo by Juanmonino/istock
Photo by Juanmonino/istock
 

EXECUTIVE
SUMMARY

 
  • The 3.8% net investment income tax applies to individual taxpayers whose net investment income exceeds certain amounts. The calculation of the tax for individuals differs from its calculation for trusts and estates.
  • If a taxpayer has both income that is subject to the tax and exempt income, the taxpayer's expenses must be allocated between the two types of income in calculating the tax.
  • Although the net investment income tax should not apply to tax-exempt income, the difference in the treatment of certain expenses on Form 8960 from their treatment on Form 1040 or 1041 may lead to the practical result that a taxpayer with both types of income will be subject to the net investment income tax on a portion of the tax-exempt income.

The Patient Protection and Affordable Care Act,1 as amended by the Health Care and Education Reconciliation Act,2 sought to ensure that all Americans have access to quality, affordable health care and was funded in part by a 3.8% tax on the net investment income of individuals, trusts, and estates. The tax went into effect Jan. 1, 2013.

To report the net investment income tax due, the taxpayer must file Form 8960, Net Investment Income Tax—­Individuals, Estates, and Trusts, beginning with the 2013 tax year. With implementation of the tax in its infancy, an unintended anomaly in the calculations on Form 8960 may have slipped through the cracks. A large number of computations in Form 8960, such as for modified adjusted gross income (MAGI), deductions properly allocable to individual taxpayers' income, undistributed net investment income, adjusted gross income (AGI), and deductions properly allocable to trust income contribute to this perhaps unintended result. The anomaly effectively penalizes the taxpayer for allocating part of its portfolio to tax-exempt income-generating assets, which is probably not what Congress intended when it enacted the net investment income tax.

This article first reviews the fundamentals of the net investment income tax and Form 8960. It then describes the anomaly in detail, examines whether Congress intended this result, and proposes solutions to eliminate the anomaly.

Basics of Net Investment Income Taxation

The net investment income tax is imposed on unearned income of individuals, estates, and trusts, including (1) interest, (2) dividends, (3) capital gains, (4) annuities,3 (5) rents, (6) royalties, (7) passive activity4 income, (8) income from a trade or business of trading in financial instruments or commodities, and (9) net gain attributable to the disposition of property, unless the property was held as part of a nonpassive activity (i.e., an active trade or business) other than a trade or business of trading in financial instruments or commodities.5 Income sources not subject to the tax include (1) active trade and/or business income (other than income from a trade or business of trading in financial instruments or commodities);6 (2) distributions from qualified retirement plans, including IRAs;7 (3) income subject to self-employment tax;8 (4) municipal bond interest;9 (5) Social Security benefits;10 (6) life insurance death benefits;11 (7) alimony;12 (8) unemployment compensation;13 and (9) wages.14

For an individual whose MAGI exceeds the threshold amount, net investment income tax is imposed for each tax year at a rate of 3.8% of the lesser of (1) net investment income for that tax year, or (2) the excess (if any) of the taxpayer's MAGI for that tax year over the threshold amount15 ($250,000 for married taxpayers filing jointly (or a surviving spouse), $125,000 for married taxpayers filing separately, and $200,000 for all other individuals).16

For an estate or trust, net investment income tax is imposed for each tax year at a rate of 3.8% on the lesser of the (1) undistributed net investment income for that tax year, or (2) the excess (if any) of adjusted gross income (AGI) for that tax year over the dollar amount at which the highest tax bracket in Sec. 1(e) begins.17 For 2014, the highest Sec. 1(e) tax bracket begins at taxable income of $12,150; for 2015, it is $12,300.

Allowable Deductions When Calculating Net Investment Income Tax

Regs. Sec. 1.1411-4(f) sets forth the deductions allowed against net investment income, which include (1) investment advisory and brokerage fees (subject to a 2% floor on miscellaneous itemized deductions);18 (2) investment interest expense; (3) state, local, and foreign taxes that are allocable to net investment income under Regs. Sec. 1.1411-4(g)(1); (4) items described in Sec. 212(3), such as tax preparation fees and legal fees in connection with the determination, collection, or refund of any tax, to the extent allocable to net investment income under Regs. Sec. 1.1411-4(g)(1) (for individuals only, subject to the 2% floor on miscellaneous itemized deductions); and (5) fiduciary expenses, to the extent allocable to net investment income under Regs. Sec. 1.1411-4(g)(1).

Regs. Sec. 1.1411-4(g)(1) states that any reasonable method may be used in determining the amount of expenses allocable to net investment income. The final regulations do not provide examples of unreasonable methods, but they do provide one example of a reasonable method. "Examples of reasonable methods of allocation include, but are not limited to, an allocation of the deduction based on the ratio of the amount of a taxpayer's gross income (including net gain) described in §1.1411-4(a)(1) [i.e., gross income from interest, dividends, annuities, royalties, and rents] to the amount of the taxpayer's adjusted gross income (as defined under section 62 (or section 67(e) in the case of an estate or trust))."19

Although the regulations do not specifically state that deductions should be allocated to tax-exempt income, since properly allocable deductions must be allocated to excluded income, that appears to include tax-exempt income.20 One reasonable method to allocate state, local, and foreign taxes, and legal, tax preparation, and fiduciary fees between net investment income and non-net investment income is to use ratios of those fees. For example, if a trust has tax-exempt income of $150,000 (which is not subject to the net investment income tax) and investment income of $450,000, the ratio of investment income to total income (75%) would determine the portion of state, local, and foreign taxes and legal, tax preparation, and fiduciary fees that would be deducted against net investment income.

Note that for purposes of regular income tax under Sec. 1(e), tax preparation fees are fully deductible against a trust's overall taxable income.21 State and local taxes are also fully deductible against a trust's overall taxable income.22 Legal fees, depending on the reason they were incurred, may or may not be fully deductible.23 Fiduciary fees are deductible, except to the extent allocable against tax-exempt income.24 The difference between the two rules creates a disparity between the amount of state, local, and foreign taxes, and legal, tax preparation, and fiduciary fees deductible on Form 1041, U.S. Income Tax Return for Estates and Trusts, and the amount deductible on Form 8960.

Example 1: A complex trust has $120,000 of dividend income, $180,000 of tax-exempt interest, and $20,000 of tax preparation fees. On Form 1041, the taxable income of the trust would be $99,900 ($120,000 - $20,000 - $10025). On Form 8960, however, the trust's net investment income would be $112,000 ($120,000 - $8,000); the trust will claim a deduction for only 40% of the $20,000 in tax preparation fees.

The disparity of allowable deductions may seem unfair, but, in this case, the disparity will have no effect on the net investment income tax owed. Since the net investment income tax is levied on the lesser of (1) total undistributed net investment income or (2) total AGI less the amount of the highest bracket applicable to the taxpayer, the trust in question will owe net investment income tax only on the second amount. The trust will owe net investment income tax on $87,750 ($120,000 - $20,000 - $10026 - $12,150 = $87,750). Therefore, the trust will be taxed on the income reported on Form 1041 less the highest bracket.

Calculating Total Net Investment Income for Individuals

Form 8960 has three parts: (1) investment income, (2) investment expenses allocable to investment income and modifications, and (3) tax computation.

Part I starts by reporting items directly from Form 1040, U.S Individual Income Tax Return, and then adjusting those items up or down to arrive at the individual's27 total investment income.28 For example, if an individual has flowthrough business income of $10,000 from a partnership, which is reported on line 17 of Form 1040, that same $10,000 is reported on line 4a of Form 8960. If the partnership income was from an active trade or business and the partner was an active participant in the business, then the income is not considered net investment income.29 Therefore, line 4b of Form 8960 would show a subtraction of $10,000, resulting in zero taxable income for net investment income purposes.

Part II reports deductions that are properly allocable against net investment income.30

Part III calculates the net investment income tax due based on the lesser of (1) the individual's net investment income for that tax year, or (2) the excess (if any) of (a) the individual's MAGI for that year, over (b) the threshold amount, which is $250,000 for married taxpayers filing jointly (or a surviving spouse), $125,000 for married taxpayers filing separately, and $200,000 for all other individuals.31

According to Regs. Sec. 1.1411-2(c), MAGI is AGI increased by the excess of (1) the amount excluded from gross income under Sec. 911(a)(1);32 over (2) the amount of any deductions (taken into account in computing AGI) or exclusions disallowed under Sec. 911(d)(6)33 for amounts excluded from gross income under Sec. 911(a)(1). An individual's AGI is defined in Sec. 62; also see line 38 on Form 1040. The general rule is that an individual's AGI is gross income minus deductions allowed in Secs. 62(a)(1) through (21).34

Calculating Total Net Investment Income for Trusts

Undistributed Net Investment Income (Form 8960)

Trusts complete Form 8960 as individuals would, except a trust's threshold amount is determined by reference to the income tax brackets for trusts set forth in Sec. 1(e). Part I and Part II are completed using data from Form 1041 instead of Form 1040. The chief difference, however, arises from Part III: Since trusts are taxed only on undistributed net investment income, Form 8960 must account for distributed net investment income and avoid taxing the trust on the amounts that have been distributed to beneficiaries; this net investment income will instead be taxed on the return of the individual beneficiary to whom the income was distributed.

Completing Form 8960, Part III for trusts: Undistributed net investment income of a trust is calculated by starting with the trust's total net investment income,35 which is computed by subtracting the total amount of deductions and adjustments in Part II from the total amount of income in Part I, reduced by (1) the net investment income included in the distributions to beneficiaries deductible by the trust under Sec. 651 or Sec. 661 (permitting deductions from trusts or estates for distributions), and (2) the net investment income for which the estate or trust is entitled to a Sec. 642(c) deduction for a charitable contribution.36

For distributions to beneficiaries that are made up of both net investment income and tax-exempt income, the class system of income categorization under Secs. 651-663 is used to determine the trust's net investment income reduction. According to Regs. Sec. 1.651(b)-1, the trust's distribution deduction does not include items of trust income that are not included in gross income, which means that the distribution deduction is reduced by the allocable portion of any nontaxable income distributed. Using the example from the regulations, if a trust's distributable net income (DNI) is $99,000 but includes nontaxable income of $9,000, then the trust's total DNI deduction under Sec. 651 will be $90,000 ($99,000 - $9,000).

AGI of a trust or estate is defined in Sec. 67(e). To calculate it, one starts with total income reported on line 9 of Form 1041 and subtracts (1) administration costs of the estate or trust (fiduciary fees; attorney, accountant, and return preparer fees; and other deductions not subject to the 2% floor) to the extent they are incurred in trust administration, (2) the income distribution deduction, (3) the amount of the exemption, (4) the domestic production activities deduction, and (5) the net operating loss deduction.37 Note that investment interest expense, taxes, charitable deductions, and miscellaneous itemized deductions are not subtracted when arriving at AGI.

Distributed net income (Schedule K-1): When a distribution is made from a trust to a beneficiary, the beneficiary must report items of net investment income on his or her individual tax return. The beneficiary's net investment income is equal to all taxable amounts reported on the Schedule K-1 adjusted by the amount reported in box 14, other information, code H (adjustment for Sec. 1411 net investment income or deduction) of Schedule K-1.38 This calculation mirrors the way that net investment income would be reported on Form 8960 if it were attached to the beneficiary's individual tax return.

The trust's Form 8960 and the beneficiary's Schedule K-1 complement each other; in theory, combining the two forms should result in taxation of an amount equal to, or less than, 100% of the trust's total net investment income, both distributed and undistributed. Consider the following example:

Example 2: The M Family Trust recognizes $25,000 of interest income in the year 2014. The M Family Trust's total miscellaneous itemized deductions allocable to investment income amount to $10,000. Therefore, the M Family Trust's total net investment income is $15,398 ($25,000 - $10,000 + $39839). The M Family Trust distributes $5,000 to D, the trust's sole beneficiary. The M Family Trust retains $10,398 of the $15,398 total net investment income as undistributed net investment income.

The M Family Trust is taxed on the lesser of (1) undistributed net investment income or (2) the trust's total AGI, reduced by the highest trust tax bracket (the threshold amount). The M Family Trust's undistributed net investment income is $10,398. The trust's total AGI is $19,900,40 and the dollar amount at which the highest tax bracket in Sec. 1(e) begins for 2014 is $12,150; thus, its AGI over the threshold amount is $7,750 ($19,900 - $12,150). Since this amount is less than undistributed net investment income, the M Family Trust is taxed on $7,750 of net investment income. The trust's sole beneficiary, D, is taxed on $5,000 of net investment income on his or her Schedule K-1. Note that the total net investment income taxed, which is $12,750, is less than the combined net income taxed on the M Family Trust's Form 1041 and on Schedule K-1, which is $15,398.41

Disparities Between Forms in Deducting Certain Expenses

While theory dictates that the total taxable net investment income on Forms 1040, 1041, and 8960 should match, subtle differences among the three calculations (taxable income, net investment income, and AGI) give rise to results that Congress probably did not intend. Namely, Forms 1040, 1041, and 8960 differ on the deductibility of (1) tax preparation fees; (2) legal fees; (3) fiduciary fees;42 (4) miscellaneous itemized deductions; (5) investment interest expense; (6) charitable deductions; and (7) state and local taxes (see the exhibit below).

Exhibit: Differences in deductibility of certain expenses

The Anomaly Revealed: A Tax on Tax-Exempt Income?

When the aforementioned disparities in deductibility are applied to an individual or a trust reporting both taxable and tax-exempt income, the result is that the net investment income taxed on Form 8960 is a higher amount than the total taxable income reported on Form 1040 (excluding the individual's exemption) or Form 1041 (excluding the trust's exemption).

Application to Individuals

Example 3: J (an individual) has the following tax items:

  • Dividend income of $1,650,000;
  • State taxes paid of $300,000 ($230,000 of which is attributable to net investment income); and
  • Tax preparation fees of $50,000.

J calculates the taxable income reported on Form 1040 as follows: $1,650,000 - $300,000 - $50,000 + $33,00043 + $41,87444 = $1,374,874.

Since all of J's taxable income is net investment income, the net investment income is $1,403,000 ($1,650,000 - $230,00045 - $17,000). J's MAGI over the threshold amount is $1,450,000 ($1,650,000 - $200,000). Therefore, the amount of income taxed for net investment income purposes is $1,403,000 (lesser of $1,403,000 or $1,450,000). That amount is less than the taxable income reported on Form 1040.

Sample 1040

 

Example 4: Consider Example 3 with $1,100,000 of tax-exempt interest income added to all of J's tax items.

J's taxable income, as reported on Form 1040 is $1,374,874 ($1,650,000 - $300,000 - $50,000 + $33,000 + $41,874). Her net investment income, as reported on Form 8960, line 12 is $1,403,000 ($1,650,000 - $230,000 - $17,00046). J's MAGI over the threshold amount, as reported on Form 8960, line 15, is $1,450,000 ($1,650,000 - $200,000). Therefore, the amount of income taxed for net investment income purposes is $1,403,000 (lesser of $1,403,000 or $1,450,000), which is in excess of the total taxable income reported on Form 1040. The difference of $28,126 can be explained by the difference between the nondeductible portion of the state taxes and tax preparation fees ($103,000) and the combined reduction of itemized deductions on Schedule A ($74,874).

Sample for 8960

 

Application to Trusts

Example 5: The D Family Trust has the following tax items:

  • Dividend income of $90,000;
  • Capital gains of $30,000;
  • Tax preparation fees of $20,000; and
  • Miscellaneous itemized deductions of $30,000.

The taxable income reported on Form 1041 (absent the trust's exemption) is calculated as follows: $90,000 + $30,000 - $20,000 - $30,000 + $1,99847 = $71,998.

Since all of the trust's taxable income is net investment income, its undistributed net investment income is also equal to $71,998. The trust's AGI less the highest applicable tax bracket is $87,750 ($90,000 + $30,000 - $20,000 - $10048 - $12,15049). Therefore, the amount of income taxed for net investment income purposes is $71,998 (lesser of $71,998 or $87,750), which is equal to the taxable income reported on Form 1041.

Example 6: Consider Example 5 with $40,000 of tax-exempt interest income added to all of the D Family Trust's tax items.

The trust's taxable income, as reported on Form 1041, and absent the exemption, is $79,498 ($90,000 + $30,000 - $20,000 - $22,50050 + $1,998). The trust's undistributed net investment income, as reported on Form 8960, is $84,498 ($90,000 + $30,000 - $15,00051 - $22,500 + $1,998). The trust's AGI over the threshold amount, as reported on Form 8960, is $87,750 ($90,000 + $30,000 - $20,000 - $100 - $12,150). Therefore, the amount of income taxed for net investment income purposes is $84,498 (lesser of $84,498 or $87,750), which exceeds the total taxable income reported on Form 1041. The nondeductible portion of the tax preparation fees ($5,000) causes the difference.

In the above example of the D Family Trust, the nondeductible portion of the tax preparation fees is less than miscellaneous itemized deductions (adjusted for the 2% floor). Consequently, the trust's AGI over the threshold amount exceeds its undistributed net investment income. However, even when the trust's miscellaneous itemized deductions are less than the nondeductible portion of professional fees and its undistributed net investment income exceeds its AGI over the threshold amount, the lesser of the two will still exceed the trust's total taxable income reported on Form 1041.

Example 7: Assume the D Family Trust has the same tax items (including the tax-exempt income), except tax preparation fees are increased to $50,000.

The trust's taxable income reported on Form 1041 (absent the exemption) is $48,898 ($90,000 + $30,000 - $50,000 - $22,500 + $1,398). The trust's undistributed net investment income is $61,398 ($90,000 + $30,000 - $37,500 - $22,500 + $1,398). The trust's AGI over the threshold amount is $57,750 ($90,000 + $30,000 - $50,000 - $100 - $12,150). Therefore, the amount of income taxed for net investment income purposes is $57,750 (lesser of $61,398 or $57,750), which is in excess of the taxable income reported on Form 1041 by $8,852.

As the trust's tax-exempt income increases, the allowable amount of miscellaneous itemized deductions decreases for purposes of Form 1041. As allowable miscellaneous itemized deductions decrease, the income taxed on Form 8960 approaches the income taxed on Form 1041. When the allowable miscellaneous itemized deductions are equal to or less than the amount at which the trust's highest tax bracket under Sec. 1(e) begins, there ceases to be a discrepancy between the income taxed on Form 1041 and Form 8960. The trust's AGI over the threshold amount equals the trust's adjusted total income on Form 1041, so the income taxed on Form 8960 will be at most equal to the income taxed on Form 1041.

The example of the D Family Trust implicates tax preparation fees and miscellaneous itemized deductions in causing the anomaly. However, the anomaly will appear when any combination of items not deductible against AGI amount to a total greater than the trust threshold amount. Those items include investment interest expense, state and local taxes, and charitable deductions.

In a portfolio consisting of both taxable and tax-exempt income, the anomaly results in an effective net investment income tax on income that should be completely tax-exempt. The result is inconsistent with general tax principles that ownership of tax-exempt obligations should not increase a taxpayer's federal tax liability. In addition, the IRS interpreted the statute as excluding interest on state or local bonds when it issued Regs. Sec. 1.1411-1(d)(4)(i).

Sample Form 8960

Why the Anomaly Exists and What Can Be Done About It

The anomaly occurs as a result of inconsistency in deductibility of the items to determine taxable income on Forms 1040 and 1041 and net investment income on Form 8960, and it appears regardless of whether a trust distributes net investment income to beneficiaries. The discrepancy in deductibility occurs because Form 8960 ultimately draws from three different areas of the Code: Chapter 1, Subchapter B; Chapter 1, Subchapter J; and Chapter 2A. While Form 8960 attempts to reconcile the differences among the three, the anomaly shows that some refinement may be necessary.

The easiest way to eliminate the anomaly would be to amend Regs. Sec. 1.1411-4(g)(1) to state: "In the case of a properly allocable deduction described in section 1411(c)(1)(B) and paragraph (f) of this section that is allocable to both net investment income and excluded income (except for tax-exempt income), the portion of the deduction that is . . ."

This amendment would effectively eliminate the anomaly while maintaining the integrity of the limitation on deductions against other excluded income.

Conclusion

The result of the anomaly is that a portfolio consisting of both taxable and tax-exempt investments may be subject to higher net investment income tax because of the allocation of certain expenses to tax-exempt income. The anomaly does not arise in a portfolio of solely taxable investments or solely tax-exempt investments.

Congress clearly did not intend the net investment income tax to extend to tax-exempt investments.52 What is not clear is whether Congress intended to increase the amount of regular income, taxed for purposes of net investment income, when the portfolio consists of tax-exempt investments. This possible unintended result inadvertently penalizes taxpayers based on their investment choices. If this result was not intended, repairing the anomaly and aligning Form 8960 with congressional intent would most likely require amending the regulations.  

Footnotes

1Patient Protection and Affordable Care Act, P.L. 111-148.

2Health Care and Education Reconciliation Act, P.L. 111-152.

3Except for distributions from qualified plans under Sec. 1411(c)(5).

4See generally Sec. 469.

5Sec. 1411(c).

6Regs. Sec. 1.1411-4(b).

7Regs. Sec. 1.1411-8.

8Regs. Sec. 1.1411-9.

9Regs. Sec. 1.1411-1(d)(4)(i).

10Regs. Sec. 1.1411-1(d)(4)(ii).

11Sec. 101(a)(1).

12Regs. Sec. 1.1411-1(d)(4); Instructions to Form 8960, p. 1 (2014).

13Id.

14Id.

15Sec. 1411(a)(1).

16Sec. 1411(b).

17Sec. 1411(a)(2) (emphasis added).

18Sec. 212(1); IRS, "Questions and Answers on the Net Investment Income Tax," Q&A 13, available at www.irs.gov. Sec. 67(a) allows the amount of miscellaneous itemized deductions only to the extent that the total of those deductions exceeds 2% of AGI.

19Regs. Sec. 1.1411-4(g)(1).

20Regs. Sec. 1.1411-1(d)(4)(i). See Freda, "Many Questions Remain as First Net Investment Tax Filing Season Opens," 144 Bloomberg BNA Daily Tax Report J-1 (July 28, 2014), available at www.bna.com.

21Regs. Secs. 1.212-1(a)(1) and 1.212-1(l). Sec. 265 calls for the allocation of all expenses deductible under Sec. 212 between taxable and tax-exempt income, but allocating any portion of tax preparation fees to tax-exempt income is not required because tax-exempt income is not included in the tax return. See Pippin, "Income Tax Accounting for Trusts and Estates," 210 Journal of Accountancy 62 (October 2010).

22Form 1041 Instructions, p. 22.

23Regs. Sec. 1.212-1(g).

24Id.

25The tax exemption allowed for complex trusts. See Form 1041 instructions, line 20.

26The tax exemption allowed for complex trusts.

27The term "individuals" refers to all natural persons who are U.S. taxpayers, regardless of filing status.

28IRS Form 8960, Part I, line 8.

29Discussions of Sec. 469 passive activity rules are beyond the scope of this article.

30See "Allowable Deductions When Calculating Net Investment Income Tax" on p. 823.

31Sec. 1411(a)(1).

32The foreign earned income exclusion.

33The deductions disallowed against foreign income excluded under Sec. 911(a).

34Sec. 62(a).

35Regs. Sec. 1.1411-3(a)(1)(ii)(A); Form 8960, Part III, line 18a.

36Regs. Sec. 1.1411-3(e); Form 8960, Part III, line 18b.

37See generally Secs. 67(e)(1) and (2); Form 1041 Instructions, p. 24.

38Form 1041 Instructions, p. 32.

39Represents the 2% floor for miscellaneous itemized deductions ([$25,000 (interest income) - $5,000 (distribution) - $100 (complex trust exemption)] × 2% = $398).

40The trust's AGI is computed as follows: $25,000 (interest income) - $5,000 (distribution) - $100 (complex trust exemption) = $19,900.

41Taxable income on Form 1041 of $10,398 and taxable income on D's Schedule K-1 of $5,000.

42Only applicable to trusts.

43This amount represents the 2% AGI limitation on line 26 of Schedule A, Itemized Deductions ($1,650,000 × 2%).

44This amount represents the itemized deduction limitation ([$1,650,000 - $254,200] × 3%).

45This amount represents the deductible portion of state taxes paid during the year.

46This amount represents the deductible portion of tax preparation fees; 40% of the tax preparation fees will be disallowed as allocable to tax-exempt income ($50,000 × [1 - 0.40]).

47This amount represents the 2% floor for miscellaneous itemized deductions ([$90,000 (dividend income) + $30,000 (capital gains) - $20,000 (tax preparation fees) - $100 (complex trust exemption)] × 2% = $1,998).

48See n. 25,supra.

49The amount at which the highest tax bracket begins for trusts under Sec. 1(e).

50The deductible portion of miscellaneous itemized deductions; 25% of the miscellaneous itemized deductions will be disallowed as allocable to tax-exempt income.

51The deductible portion of tax preparation fees; 25% of the tax preparation fees will be disallowed as allocable to tax-exempt income.

52Regs. Sec. 1.1411-1(d)(4).

 

Contributors

Michele Schlereth is a senior manager in the trusts and estates department at the Melville, N.Y., office of Baker Tilly Virchow Krause LLP. Matthew Rappaport is a sole practitioner with offices in New York City and Garden City, N.Y.

 

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