Form 1041 Distribution Tiers if Trust makes distribution optional

[DimitriConstantine]

Hello,

I'm still getting a handle on how distributions are classified. If, say, a testamentary trust (Complex) says that whether 5% distribution is done in a given year is up to the beneficiary and trustee. So, does that mean that any distribution done is *all* Second Tier ("Other Amount") even though it's a mix of accounting income and principal? Or, is the accounting income input into the first tier and the remainder (if in excess) placed in second?

What really confuses me as well is, are these Tiers actuall taxed differently or is it merely a matter of the IRS wanting to know how the trust defines things?

[M-MTax]

Tier 1 is income that must be distributed.....whether distributed or not.

Tier 2 is any distribution other than Tier 1. 

One difference is trusts required to distribute all income get a larger exemption ($300 versus $100).

IRS doesn't care as long as all income and gain is reported and taxed to the trust or benes. 

[DimitriConstantine]

Ah, okay... so if the trust requires a distribution to be made, there's a lower tax liability?

Also, why is this question (whether distribution is required or not) not asked when total trust accounting income is distributed? Is TurboTax simply assuming that it is required and therefore tier one only?

[M-MTax]

Distributions of income and gain lower the trust's tax liability and increase that of the benes. 

If the trust distributes all of its income and gain to the benes then it gets an income distribution deduction not the trust exemption.

You have to choose simple or complex trust in Turbotax. Choosing simple would result in the income being Tier 1 on Line 9 of Sch B of the 1041.