When it comes to estate planning, the point is to reduce the amount of potential taxes and other expenses for your beneficiaries. This could include your children or other special individuals in your life. While there are many areas that your tax professional or estate planner can use to assist you in this process, including trusts and charitable giving. However, there are also fees that come as part of the estate planning process. When you are planning for your tax return, you may wonder if the costs of all that planning are deductible. You will need to consult with your tax professional or accountant, such as James Wells EA MBA Tax Office in Santa Cruz, CA, to determine if you can deduct your particular expenses. However, here is a look at the conditions the IRS sets for these types of expenses.
Planning for Your Estate’s Future
When you first consult with your estate planner, you will discuss the options that are available for your unique circumstances. This may include setting up several trusts or just one, along with a will and other items. Yet once you have completed this process, you will have put in place some tax saving devices that will allow your spouse and other beneficiaries the luxury of not having to sell assets to cover estate taxes.
Still, you also want to benefit now. This comes in the form of a deduction for all the different costs that you have incurred during the planning process. However, the IRS has a few requirements to deduct these costs. The first is that the fees must have been paid for the production or collection of income. The second requirement is that the fees must have been paid for the management, conservation or maintenance of property held for the production of income. Finally, the fees must have been paid in connection with the determination, collection or refund of any specific tax.
Now let’s show how this would apply to estate planning. For example, if an estate plan involves advice on how to construct an income generating instrument, such as an income trust, then you would be able to deduct the fees from the planning and structuring of that instrument.
Another option is if the estate planner provides guidance on how to use your property transfer methods, especially those that involve trusts, to avoid any federal or state estate or inheritance taxes, then that would make those expenses deductible. Therefore, you will want to make sure that you keep track of all the invoices and receipts related to these processes, as they will serve as your documentation for the deduction.
Working with your tax preparer, you can determine if all of your expenses are meeting the requirements of the IRS and will be deemed deductible. Still, before you think an invoice is enough to meet your deductible requirement, you need to make sure that the invoice includes details regarding the expenses and how they relate to the current or future production of income or are regarding the current or future tax payments.
What does not count are any parts of estate planning that are just related to the transfer of property or the transfer of guardianship, as is typically common with most wills. Additionally, you cannot count the use of estate planning instruments that are common, such as powers of attorney, living wills or even the writing of trusts to prevent estate assets from being put into a probate situation. The IRS would look upon these situations as personal expenses, so they would not qualify for any particular type of deduction.
How Do You Deduct These Expenses?
So how can you deduct the expenses that do meet the IRS requirements? You will need to itemize your deductions and take all your expenses as miscellaneous deductions. This means that these expenses will be subject to the 2% of your adjusted gross income floor. As a result, you might not be able to deduct the full amount of your expenses. Additionally, if you do not meet the 2% threshold, you will not be able to deduct those expenses.
As you can see, there is the possibility that you will be able to deduct some the expenses that are incurred during your estate planning process. Therefore, you will want to work with your tax professional to determine if your expenses qualify for this deduction.
Click on the link below to connect with a tax professional or accountant at the offices of James Wells EA MBA Tax Office in Santa Cruz, CA, to determine if your estate planning expenses qualify for a deduction on your current year’s tax return.
James Wells EA MBA Tax Office
