Trust Expenses List: Deductible, Nondeductible, and Final-Year Excess

On a non-grantor trust’s Form 1041, the deductible and non-deductible trust expenses sort along a single line: costs that exist only because the property sits in a trust are fully deductible, and costs an individual owner would also pay are not. Trustee compensation, fiduciary tax preparation, and legal fees to interpret or defend the trust fall on the deductible side. Investment advisory fees, brokerage commissions, custodial fees, and real estate management fees fall on the other, and after Congress made the suspension of miscellaneous itemized deductions permanent in 2025, they now produce zero federal tax benefit.

First, Confirm the Trust Is Its Own Taxpayer

None of this applies to a grantor trust, including most revocable living trusts during the grantor’s lifetime. The IRS treats a grantor trust as invisible for income tax purposes and attributes all income, deductions, and credits directly to the grantor’s Form 1040.¹ The deduction rules below govern non-grantor trusts, which file their own Form 1041, claim their own deductions, and pay tax at their own compressed rates.

Expenses That Are Fully Deductible

Section 67(e) of the Internal Revenue Code allows a trust to deduct, in arriving at adjusted gross income, any cost that would not have been incurred if the property were held by an individual.² These deductions apply regardless of how much income the trust earns, and they reduce taxable income dollar for dollar. The core categories:

Trustee fees, including acceptance fees, annual management fees, and distribution fees paid for fiduciary services.
The portion of accounting fees attributable to preparing Form 1041, Schedules K-1, and other fiduciary-specific tax calculations.³
Legal fees to construe ambiguous trust provisions, defend the trust against claims, or terminate the trust.
Court filing fees for judicial accountings and other mandated court supervision.
Appraisal costs needed for fiduciary accounting, distributions, or trust tax compliance.

Fiduciary fees are reported on Form 1041, Line 12, and other administration expenses go on Line 15a.³

Expenses That Are No Longer Deductible

The Tax Cuts and Jobs Act of 2017 suspended all miscellaneous itemized deductions subject to the 2% adjusted gross income floor, originally through 2025. The One Big Beautiful Bill Act, enacted in 2025, struck the expiration date and made the suspension permanent.² For 2026 and every year after, these deductions no longer exist for trusts.

The dividing line between a §67(e) trust expense and a disallowed miscellaneous itemized deduction comes from Knight v. Commissioner, 552 U.S. 181 (2008). The Supreme Court held that investment advisory fees paid by a trust fall under the 2% floor because hiring an investment adviser is something individuals commonly do.⁴ The test is not whether the trust needed the service. It is whether a hypothetical individual in a similar position would customarily incur the same cost.

Expenses that fail the Knight test, and therefore produce no deduction:

Investment advisory and management fees.
Brokerage commissions and custodial fees on trust investment accounts.
Real estate management fees, since individual property owners also hire managers.
The portion of accounting fees that relates to ordinary income reporting rather than fiduciary-specific calculations.

Before 2018, these expenses were at least partially deductible to the extent they exceeded 2% of the trust’s AGI. Now they are gone entirely. That makes the classification between unique trust expenses and ordinary investor expenses the single most consequential call on the return.

Splitting a Bundled Trustee Fee

Most corporate and professional trustees charge a single fee that covers fiduciary oversight, beneficiary dealings, distribution decisions, and investment management together. Treasury regulations require that bundled fee to be split between the portion unique to trust administration (deductible) and the portion attributable to investment advice (non-deductible).⁵ For fees not calculated on an hourly basis, only the investment-advice portion is treated as a miscellaneous itemized deduction. The rest stays fully deductible.

Any reasonable allocation method works. The IRS treats these factors as reasonable: the percentage of trust assets subject to investment management, what a standalone investment adviser would charge for comparable services, and how much of the trustee’s time goes to investment decisions versus beneficiary administration and distribution planning.

This is where trustees often leave money on the table. A corporate trustee charging 1% of assets under management may devote only a fraction of that fee to actual investment selection. If the trustee can document that 60% of the work involves beneficiary administration, tax compliance, and distribution planning, 60% of the fee remains deductible. Request a detailed fee breakdown from the service provider, or, for individual trustees, keep time records that support the allocation. Costs billed separately from the bundled fee are evaluated on their own: a separately invoiced legal bill for trust interpretation is fully deductible no matter how the bundled fee shakes out.

Two Situations That Quietly Shrink Deductions

Expenses Allocable to Tax-Exempt Income

If the trust holds municipal bonds or other tax-exempt investments, IRC §265 disallows the portion of administrative expenses allocable to that tax-exempt income.⁶ If 20% of the trust’s income is tax-exempt, roughly 20% of its otherwise-deductible costs are disallowed. The limitation applies even to §67(e) expenses: a trustee fee that qualifies as unique to trust administration still loses deductibility to the extent it is allocable to tax-exempt income.

Charitable Contributions

Trusts get a charitable deduction under IRC §642(c) that works differently from the individual version. A trust can deduct any amount of gross income paid during the year to a qualifying charity, without the percentage-of-income caps that apply to individuals, provided the trust instrument authorizes charitable distributions.⁷ Two limits matter. The deduction applies only to amounts paid from gross income, not from principal. And if the instrument is silent on charitable giving, the trustee has no authority to make the gift and no deduction is available. Qualifying charitable payments are reported on Form 1041, Schedule A.

Excess Deductions in the Trust’s Final Year

When a trust terminates, deductions sometimes exceed income. Under IRC §642(h), the excess passes through to the beneficiaries who succeed to the trust’s property, and it retains its character.⁸ A §67(e) expense stays an above-the-line deduction on the beneficiary’s Schedule 1 (Form 1040). A non-miscellaneous itemized deduction stays itemized on Schedule A.⁹

The rules are strict. Beneficiaries can only use these deductions in the year the trust terminates, and any unused portion cannot be carried forward.⁹ A trustee with flexibility over when to close the trust should coordinate with beneficiaries to pick a termination year in which they will have enough income to absorb the deduction. Because the suspension of miscellaneous itemized deductions is permanent, any excess deductions classified as miscellaneous itemized deductions produce no benefit for the beneficiary either.

Why the Classification Matters So Much

Trusts use a compressed version of the individual income tax brackets. For 2026, a trust hits the 37% top rate once taxable income exceeds roughly $16,000. An individual does not reach that rate until income passes about $626,000. Every deductible dollar is worth far more inside a trust: shaving $5,000 off a trust’s taxable income can save nearly $1,850 in federal tax.

The built-in cushion is minimal. A simple trust gets a $300 personal exemption, and a complex trust gets $100.⁷ Legitimate expense deductions are effectively the only tool for reducing the trust’s bill.

Substantiation matters as much as classification. For each expense, keep records showing the payee, the amount, proof of payment, the date, and a description of the service.¹⁰ For bundled fees, keep the written fee breakdown, time records, or comparable third-party quotes that back up the allocation.

Getting it wrong is expensive. An accuracy-related penalty of 20% of the underpayment applies when improper deductions cause a substantial understatement of tax. For a trust, a substantial understatement exists when the tax shown on the return is understated by the greater of 10% of the correct tax or $5,000.¹¹ Given how quickly trust income reaches the top bracket, even a modest misclassification can trip that threshold.

1
Office of the Law Revision Counsel. 26 USC 671 – Trust Income, Deductions, and Credits Attributable to Grantors and Others as Substantial Owners
2
Office of the Law Revision Counsel. 26 USC 67 – 2-Percent Floor on Miscellaneous Itemized Deductions
3
Internal Revenue Service. 2025 Instructions for Form 1041 and Schedules A, B, G, J, and K-1
4
Justia Law. Knight v Commissioner, 552 US 181 (2008)
5
GovInfo. 26 CFR 1.67-4 – Costs Paid or Incurred by Estates or Non-Grantor Trusts
6
Office of the Law Revision Counsel. 26 USC 265 – Expenses and Interest Relating to Tax-Exempt Income
7
Office of the Law Revision Counsel. 26 USC 642 – Special Rules for Credits and Deductions
8
eCFR. 26 CFR 1.642(h)-2 – Excess Deductions on Termination of an Estate or Trust
9
Internal Revenue Service. Instructions for Schedule K-1 (Form 1041) for a Beneficiary Filing Form 1040 or 1040-SR (2025)
10
Internal Revenue Service. What Kind of Records Should I Keep
11
Internal Revenue Service. Accuracy-Related Penalty