Distributions on a final trust return

[brakeshoe87]

I am using TurboTax for Business 2022 to file a final return on a Complex Trust from my deceased parents for benefit of my son.  In 2022 he used the full proceeds of the trust to buy a house.  I am not aware of any special circumstances due to the house purchase.  My question pertains to the topic of the distributions.

The trust contained long term assets which had large gains on them.  I did the taxes initially by answering No to the question "Did the trust make any distributions to its beneficiaries in 2022".  Since the assets had grown considerably there was approximately 40000 in capital gains which led to a federal income tax of in excess of 12000.  

Going back later to review the return I changed this answer to Yes, since all the money was disbursed 100% to the sole beneficiary.  Everything else on the second return was entered the same.  This one change had a huge impact.  It reduced the tax due to zero! 

The screenshot below shows what I think are the pertainent values.  The New Values column is what happened when I entered Yes for distributions, and the Old Values column is when distributions were set to No.  Since this one change had a large impact, I am looking for some opinions on whether I have entered things correctly or not.  Thanks in advance.

[ThomasM125 · Accepted solution]

Since all the income was distributed to the beneficiary, it will show up on the schedule K-1 that will be issued to him from the estate. So, he will end up putting the taxable income on his personal tax return and will pay the tax using his personal tax rates, that may well be less than the estate tax rates. So what you describe sounds reasonable.

[brakeshoe87]

Thomas:

Glad to hear that I am on track for the federal return.  Any special guidance for the Pennsylvania State return.  Schedule DD is always lacking in guidance so it would be great to get some advice on filling that out.  

Thanks

[HopeS]

See attached Pennsylvania website which provides instructions on Estates and Trusts. 

Once you open the link, click on PA-41 Schedule DD on the right.

PA Department of Revenue Trusts 

@brakeshoe87 

[brakeshoe87]

Link didn't work, but I assume it was just to the PA 41 Schedule DD instructions which I have seen.  The wording there is somewhat difficult to understand.  Lines 8 and 9 are somewhat mystifying.  This trust has no required distributions, but the entire trust was liquidated.  Not sure how to reflect the complete liquidation on Schedule DD.

[DaveF1006]

If an estate or trust has no distributions or is not distributing its income, the estate or trust is not required to complete PA-. 41 Schedule DD per PA 41 Schedule DD instructions. This applies to trust liquidations that has no distributions or income to distribute. 

@brakeshoe87 
 

[brakeshoe87]

I am still lost here on the State Tax piece of the filing.  For the Federal return I now understand how the trust income from the liquidation of the trust moves from a Schedule K-1 on Form 1041 to the beneficiaries 1040.  

Based on the previous answer it seemed like a full distribution of the trust might not generate a PA Schedule DD.  I am unclear why this would be, since the total liquidation would include the income.  QUESTION 1 is whether a Schedule DD should be filed out when a trust is liquidated.

Based on the answer to QUESTION 1, I would like to understand how the income from the liquidation of the trust flows through to the Pennsylvania Individual Tax Forms.  Line 6 of PA Schedule RK-1 is the only line on that form that is filed in.  If Schedule DD is not completed that line would be zero.   QUESTION 2 is how to report the income from the liquidation of the trust on the PA-40, and what forms or schedules on the PA-41 are the sources.

Detailed help would be much appreciated.