If the deductions in the estate's last tax year (other than the exemption deduction or the charitable contributions deduction) are more than gross income for that year, the beneficiaries succeeding to the estate's property can claim the excess as a deduction in figuring taxable income. To establish these deductions for the beneficiaries, a return must be filed for the estate along with a schedule showing the computation of each kind of deduction and the allocation of each to the beneficiaries.
An individual beneficiary must itemize deductions to claim these excess deductions. The deduction is claimed on Schedule A (Form 1040), subject to the 2% limit on miscellaneous itemized deductions. The beneficiaries can claim the deduction only for the tax year in which or with which the estate terminates, whether the year of termination is a normal year or a short tax year.
ENTRY
Business Investment and Estate/Trust Income and click start for Schedule K-1. Make sure to say this is the final year of the Trust.
Follow the questions as appropriate and check off Box 11 - and then make the entries from the Schedule K-1 that you received.
Box 11, Code A—Excess Deductions on Termination
If this is the final return of the estate or trust, and there are excess deductions on termination, you may deduct the beneficiary’s share of the excess deductions on line 23 of Schedule A (Form 1040) as a miscellaneous itemized deduction subject to the 2% floor.
This should flow through in the TT interview if you selected this was the final year and you are eligible to itemize deductions.
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