Schedule K-1: Section 1411 adjustment amount shown as negative number

[Chocirish]

Hello!  My husband settled out his father's estate in 2016 & he's received a Schedule K-1 (form 1041).  On line 14, under "other information", the trust officer has Code H, Section 1411 Adjustment and then a negative number ($-2,814). On line 5 of the K-1 is the amount $2,814. (there was no carryover from last yr). When I plug all this information into our return it shows the $2,814 as taxable income. The Trust Officer says he can't advise us on our tax return.  Can someone please explain these figures to me?

[tagteam · Accepted solution]

" When I plug all this information into our return it shows the $2,814 as taxable income."

That would be the result of the Line 5 income on the K-1 being transferred to Line 17 of your individual income tax return and the fact that the negative number (on Line 14, Code H) is merely an adjustment on Form 8960, Net Investment Income Tax. If you are not subject to the Net Investment Income Tax (NIIT), because your income level is beneath the threshold, you will not even see the NIIT calculation on your income tax return.

The bottom line here is that the $2,814 is taxable income to you while the negative number is not an offset but (potentially) enters into another tax calculation.

[Chocirish]

Thank you, this helps.  We are way below the modified adjusted gross income of 250K, so we wouldn't be subject to the NIIT. If the negative number is not an offset but (potentially) enters into another tax calculation---what tax calculation might you be referring to?

[tagteam]

The calculation is actually the calculation of the amount of NIIT. Since you are not subject to it, you don't have to be concerned with the NIIT. However, **if** you were subject to the NIIT, the negative number would be entered on Form 8960 and **reduce** the amount that factors into the NIIT calculation.

[Chocirish]

Thank you.  No, even yr before last we weren't subject to the NIIT (this past yr is the final K-1). So, do I have to enter the $2,814 or is it an offset that I don't have to worry about?

[tagteam]

It is an offset you don't have to worry about, but I would suggest entering it anyway just for the sake of accuracy.

[pabolger]

I have an identical situation.  Thank you for your clear description.
You mentioned that the negative number (potentially) enters into another tax calculation.   I live in California.  The positive amount is included in both Federal and California taxable income,  but I believe that the negative on Line 14 of the K1 (code H) should enter the California CA Adjustment form, and offset the income.   Can anyone confirm this is true?

[priam4]

I have an identical situation as well, and I live in Colorado. I've been told I might be able to adjust the state income tax downward on my inheritance since the Trust I inherited was in Texas. My parents lived in Texas all their lives. Does anyone know about a Colorado adjustment on the Schedule K-1 Form 1041, with income only on line 5.