Line 15b—Allowable Miscellaneous Itemized Deductions Subject to the 2% Floor
Miscellaneous itemized deductions are deductible only to the extent that the aggregate amount of such deductions exceeds 2% of AGI.
Among the miscellaneous itemized deductions that must be included on line 15b are expenses for the production or collection of income under section 212, such as investment advisory fees, subscriptions to investment advisory publications, and the cost of safe deposit boxes.
Miscellaneous itemized deductions do not include deductions for:
Interest under section 163,
Taxes under section 164,
The amortization of bond premium under section 171,
Estate taxes attributable to IRD under section 691(c), or
Expenses paid or incurred in connection with the administration of the estate or trust that would not have been incurred if the property were not held in the estate or trust.
For other exceptions, see section 67(b).
The administration costs of the estate or trust (the total of lines 12, 14, and 15a to the extent they are costs incurred in the administration of the estate or trust) that would not have been incurred if the property were not held by the estate or trust;
The income distribution deduction (line 18);
The amount of the exemption (line 20);
The domestic production activities deduction claimed on line 15a; and
The NOLD claimed on line 15a.
For those estates and trusts whose income distribution deduction is limited to the actual distribution, and not the DNI (that is, the income distribution is less than the DNI), when computing the AGI, use the amount of the actual distribution.
For those estates and trusts whose income distribution deduction is limited to the DNI (that is, the actual distribution exceeds the DNI), the DNI must be figured taking into account the allowable miscellaneous itemized deductions (AMID) after application of the 2% floor. In this situation there are two unknown amounts: (a) the AMID and (b) the DNI.
AMID = Total miscellaneous itemized deductions – (.02(AGI))
The following example illustrates how algebraic equations can be used to solve for these unknown amounts.
The Malcolm Smith Trust, a complex trust, earned $20,000 of dividend income, $20,000 of capital gains, and a fully deductible $5,000 loss from XYZ partnership (chargeable to corpus) in 2012. The trust instrument provides that capital gains are added to corpus. Fifty percent of the fiduciary fees are allocated to income and 50% to corpus. The trust claimed a $2,000 deduction on line 12 of Form 1041. The trust incurred $1,500 of miscellaneous itemized deductions (chargeable to income), which are subject to the 2% floor. There are no other deductions. The trustee made a discretionary distribution of the accounting income of $17,500 to the trust's sole beneficiary.
Because the actual distribution can reasonably be expected to exceed the DNI, the trust must figure the DNI, taking into account the allowable miscellaneous itemized deductions, to determine the amount to enter on line 15b.
The trust also claims an exemption of $100 on line 20.
Using the facts in this example:
AMID = 1,500 – (.02(AGI))
In all situations, use the following equation to compute the AGI:
AGI = (line 9) – (the total of lines 12, 14, and 15a to the extent they are costs incurred in the administration of the estate or trust that would not have been incurred if the property were not held by the estate or trust) – (line 18) – (line 20).
There are no other deductions claimed by the trust on line 15a that are deductible in arriving at AGI.
Figuring AGI in this example, we get:
AGI = 35,000 – 2,000 – DNI – 100
Since the value of line 18 is not known because it is limited to the DNI, you are left with the following:
AGI = 32,900 – DNI
Substitute the value of AGI in the equation:
AMID = 1,500 – (.02(32,900 – DNI))
The equation cannot be solved until the value of DNI is known. The DNI can be expressed in terms of the AMID. To do this, compute the DNI using the known values. In this example, the DNI is equal to the total income of the trust (less any capital gains allocated to corpus or plus any capital loss from line 4); less total deductions from line 16 (excluding any miscellaneous itemized deductions); less the AMID.
Thus, DNI = (line 9) – (line 15, column (2) of Schedule D (Form 1041)) – (line 16) – (AMID)
Substitute the known values:
DNI = 35,000 – 20,000 – 2,000 – AMID
DNI = 13,000 – AMID
Substitute the value of DNI in the equation to solve for AMID:
AMID = 1,500 – (.02(32,900 – (13,000 – AMID)))
AMID = 1,500 – (.02(32,900 – 13,000 + AMID))
AMID = 1,500 – (658 – 260 + .02AMID)
AMID = 1,102 – .02AMID
1.02AMID = 1,102
AMID = 1,080
DNI = 11,920 (i.e., 13,000 – 1,080)
AGI = 20,980 (i.e., 32,900 – 11,920)
The income distribution deduction is equal to the smaller of the distribution ($17,500) or the DNI ($11,920).
Enter the value of AMID on line 15b (the DNI should equal line 7 of Schedule B) and complete the rest of Form 1041 according to the instructions.
If the 2% floor is more than the deductions subject to the 2% floor, no deductions are allowed.