The American Institute of CPAs asked the IRS to waive 2026 estimated tax penalties for estates and non-grantor trusts that underpay because of a new limitation on itemized deductions, citing a lack of guidance on how the rule applies to them.
Fiduciaries lack guidance on new limit
In a November 3, 2026, letter to the Treasury Department, the American Institute of CPAs (AICPA) asked the IRS to use its authority under IRC § 6654(e)(3)(A) to waive the penalties to the extent the underpayments are attributable to the limitation under IRC § 68.
Signed by Cheri H. Freeh, chair of the AICPA Tax Executive Committee, the letter says fiduciaries and advisors cannot accurately compute estimated tax for estates and trusts until Treasury and the IRS issue guidance.
The One Big Beautiful Bill, P.L. 119-21, replaced § 68 with the new limitation for tax years beginning after December 31, 2025. Itemized deductions are now reduced by 2/37ths of the lesser of those deductions or the amount by which taxable income, increased by the deductions, exceeds the start of the 37% rate bracket.
For estates and trusts, that bracket begins at $16,000 of taxable income for 2026, meaning “virtually all estates and non-grantor trusts with meaningful income will exceed this threshold,” the AICPA wrote. The group previously asked for guidance on how § 68 interacts with Subchapter J.
About 3.2 million fiduciary income tax returns on Form 1041, U.S. Income Tax Return for Estates and Trusts, are filed each year, and “a substantial majority” will be affected by the § 68 uncertainty, the AICPA said.
Double taxation, charitable deduction concerns
Under IRC § 651 and IRC § 661, the income distribution deduction ensures that trust or estate income is taxed only once, at either the entity level or the beneficiary level, the AICPA explained. Treating it as an itemized deduction subject to the limitation would result in double taxation, according to the letter.
A portion of distributed income would remain taxable at the trust level, while the beneficiary receiving a Schedule K-1 would also include that income in gross income. That result “would undermine the conduit principle of Subchapter J,” the group said.
In its May 28, 2026, General Explanation of the Tax Provisions of Public Law 119-21, the Joint Committee on Taxation implies that the limitation applies to the deduction, the AICPA said, because the committee reads IRC § 67(e) as limited to § 67. While not authoritative, that reading creates “substantial uncertainty” for practitioners who had concluded otherwise, the letter said.
Under IRC § 642(c), estates and trusts can also deduct, “without limitation,” gross income paid to charity under the governing instrument, language that the U.S. Supreme Court in United States v. Benedict, 338 U.S. 692 (1950), and later cases read to override other statutory limits, the AICPA noted. Applying § 68 to reduce the deduction “would appear to conflict with the plain statutory language and decades of judicial interpretation,” the letter said.
Limiting the income distribution deduction could also create circularity, according to the group. A reduced deduction would change distributable net income, which could in turn change the deduction and the limitation, requiring an algebraic solution or iterative approximation.
Past relief cited as precedent
Under § 6654(e)(3)(A), no penalty applies if the IRS determines that “by reason of casualty, disaster, or other unusual circumstances the imposition of such addition to tax would be against equity and good conscience.” The AICPA argued that a new limitation that “fundamentally alters the computation of taxable income for estates and trusts without any accompanying guidance” meets that standard.
The prior version of § 68, known as the Pease limitation, exempted estates and trusts in § 68(e), but the new provision has no such carve-out, the group noted. The Joint Committee’s explanation also came out after the first 2026 estimated tax installment was due.
As an example, the AICPA pointed to Notice 87-32, which waived estimated tax penalties for estates and trusts for installments due before July 1, 1987, after the Tax Reform Act of 1986, P.L. 99-514. The letter also cited guidance provided in Notice 2007-16, Notice 2018-26, Notice 2019-11, Notice 2021-8, Notice 2024-33, and Notice 2024-47.
Relief is also critical because fiduciaries owe duties of prudence and loyalty to beneficiaries, the group said. A fiduciary who overpays estimated tax by taking the most conservative approach could face claims from remainder beneficiaries that trust corpus was unnecessarily depleted, while one who underpays faces potential penalties and claims from income beneficiaries.
Calendar-year fiduciaries have made three 2026 estimated tax payments, and the fourth is due January 15, 2027. The AICPA asked Treasury and the IRS to issue guidance stating that 2026 required installments for estates and non-grantor trusts need not include amounts attributable to the limitation.
For more on the limitation on itemized deductions for tax years after 2025, see Checkpoint’s Federal Tax Coordinator 2d ¶ A-2731.
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