How to allocate trust capital gain on a trustee return (form 1041) in a year that there are distributions to beneficiaries.

[tagteam · Accepted solution]

"How to allocate trust capital gain on a trustee return.....in a year that there are distributions to beneficiaries."

If the trust instrument and local law allow you to allocate capital gain to the beneficiaries, then the allocation, using TurboTax Business, is done as shown in the screenshots below.

Further, do not forget to make an actual distribution in the Distributions section of the program.

[cdbrown54]

How can I get the screenshots for this reply?  Thanks,

[tagteam · Accepted solution]

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@cdbrown54 wrote:

How can I get the screenshots for this reply?  Thanks,

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See below.

[tagteam]

Screenshot of the distribution section appears below.

[relyonendyind416]

Is it true that when the capital gain is distributed to the beneficiary, the capital gain will be taxed at the beneficiary level so the trust does not pay tax on the capital gain?  When I entered the capital gains based on the screens, the tax increased at the trust level while the capital gains show up in K1 too.  Does not make sense.  Please help.

[tagteam · Accepted solution]

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@relyonendyind416 wrote:

Is it true that when the capital gain is distributed to the beneficiary, the capital gain will be taxed at the beneficiary level so the trust does not pay tax on the capital gain? 

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Yes. However, you need to follow the exact procedure (outlined above) in TurboTax Business. 

Ensure that you have allocated gain to income and to the beneficiaries. Thereafter, ensure that you have actually made a distribution.

Check your K-1s and 1041 in Forms Mode.

[relyonendyind416]

I thought I did exactly outlined in the screenshots.  Using the example in your screenshots, for the screen shot for short-term gain, I entered $3000; for the screenshot for long-term gain, I entered $2000.  Do I need to enter anything "Gains attribute to income"?  For "percentage to distribution", 100%.  The result, K1 is right. The tax under trust increased a lot.  Thanks again for help.

[tagteam]

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@relyonendyind416 wrote:

Do I need to enter anything "Gains attribute to income"? 

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Yes. You need to enter all of the gain that you intend to distribute (as allocated to income).

[relyonendyind416]

Thank you so much for the quick reply.  Do you mean that I need to enter $5000 for the screen "Enter gains attributable to income"?  You know the system better than the CPA I talked to from Turbo tax.  Thanks again

[tagteam]

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@relyonendyind416 wrote:

Do you mean that I need to enter $5000 for the screen "Enter gains attributable to income"? 

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Yes, exactly, based upon your stated intention to distribute all of the gains.

[relyonendyind416]

Ps the goal is no tax at the Trust level.  All tax are paid at the beneficiary level.  Thanks again

[tagteam]

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@relyonendyind416 wrote:

....the goal is no tax at the Trust level.  All tax are paid at the beneficiary level.

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If you distribute all of the income (including capital gains allocated to income), there should be no tax at the trust level.

[relyonendyind416]

K1 looks right. However, the tax liability under the trust doubled.  I am missing something.  Please help.  Thx

[tagteam]

If your K-1 "looks right" but your tax liability under the trust doubled then we are either both missing something or you are not interpreting what you are seeing correctly.

Unfortunately, I cannot see your return which makes it difficult (if not impossible) to troubleshoot effectively.

I will suggest that you enter Forms Mode and carefully review your 1041 and your K-1.

Frankly, if you are entering the data correctly, you should not be seeing a correct K-1 (for your scenario) coupled with tax liability for the trust.