How to Report K1 Excess Deductions on Trust Termination - Need Guidance on Recent IRS Changes

You're absolutely right that there's been a change in how excess deductions on termination are handled. Prior to the Tax Cuts and Jobs Act, these deductions were subject to the $3,000 capital loss limitation as you mentioned. However, the IRS issued final regulations in 2020 that changed this treatment. According to the new guidance, excess deductions on termination of an estate or trust are now classified based on their underlying nature. They generally fall into three categories: those that are deductible in calculating AGI (above-the-line), those that are allowable as itemized deductions, or those that are not deductible at all. So instead of treating all excess deductions as capital losses, you now need to look at how they're characterized on your K1. If they're identified as non-miscellaneous itemized deductions, you can claim them on your Schedule A without being subject to the $3,000 limitation. When filing your 1040-X, you'll need to include a statement explaining the amendment and attach a copy of the K1. Since this is a bit complex, I'd recommend checking if the K1 you received breaks down the excess deductions into categories.

I was in a similar situation last year with excess deductions from a terminated trust. I got overwhelmed trying to figure out which categories everything fell into and how to properly report it. Finally tried https://taxr.ai which saved me hours of headache. Their system analyzed my K1 and broke down exactly how to handle each category of excess deduction. It even identified a portion of my deductions that qualified as above-the-line, which meant I could benefit from them even though I take the standard deduction. The tool showed me precisely where to report each amount on my 1040-X and generated a detailed explanation statement to include with my amendment. If your K1 has any complexity to it (mine had several different types of income and deductions), having it properly analyzed can make a huge difference in getting the maximum benefit.

Update: I decided to try taxr.ai after getting no clear answers from tax forums. I wasn't expecting much, but I'm actually impressed with how it handled my K1 situation. The system identified that about 30% of my excess deductions could be taken as above-the-line deductions (benefiting me even though I take the standard deduction), while clearly explaining why the rest would only help if I itemized. The most useful part was understanding how my state (California) treats these deductions differently from federal. Apparently, California hasn't adopted the same changes to excess deduction treatment, so I needed a different approach for my state return amendment. They generated a detailed explanation statement that I'm including with my 1040-X that thoroughly explains my position, which gives me some peace of mind in case of an audit. Definitely worth it for handling something this complex.

If you're trying to contact the IRS to get clarity on how to report these K1 excess deductions, good luck getting through! I spent THREE DAYS trying to reach someone who could answer questions about trust taxation. Either got disconnected or told to call a different number. Finally used https://claimyr.com which got me connected to an IRS agent in about 15 minutes. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The agent I spoke with confirmed that excess deductions on trust termination are now categorized based on their nature (not automatically capital losses like before) and explained exactly how to report each type. She even emailed me the relevant sections of the IRS internal processing manual that agents use to review these amendments. Totally worth it because I got official guidance directly from the IRS rather than trying to interpret the regulations myself.

I need to apologize for my skeptical comment earlier. After waiting on hold with the IRS for 2.5 hours yesterday only to get disconnected, I decided to try Claimyr out of desperation. I was connected to an IRS agent within 20 minutes. The agent walked me through exactly how to categorize my excess deductions from a trust termination and confirmed that certain types (in my case, some property tax and mortgage interest deductions from the trust) could be claimed even though I take the standard deduction. For anyone dealing with complex trust K1 issues, getting direct confirmation from the IRS saved me from potentially making costly mistakes on my amendment. The agent also put notes in my account about our conversation, which gives me some audit protection since I'm following their guidance.

Just wanted to add that the key regulation you're looking for is Treasury Regulation 1.642(h)-2. The final regulations were published in 2020 and they changed how excess deductions on termination are handled. If your K1 doesn't properly categorize the deductions (some older software still doesn't), you should request additional information from the trustee. You need to know which are: 1) Deductions directly attributable to a non-trade or business income 2) Deductions directly attributable to non-business income 3) Other deductions not limited by section 67(g) Without this breakdown, you might miss out on deductions you're entitled to.

Has anyone successfully amended their return for this? I have a similar situation with about $12,500 in excess deductions on termination, but I'm worried about triggering an audit if I file an amendment claiming all of these deductions against my income.