Why is 2022 1041 for a simple trust suddenly allocating dividends between beneficiary and trust and also subtracting capital gains from income distribution deduction?

[tuteurjohn]

2021 filing also in Turbotax did not have these changes

[tagteam · Accepted solution]

With respect to dividends, you may need to make a distribution to the beneficiary(ies) despite the fact that the trust was marked as a simple trust in the program.

Capital gains typically remain with the trust unless the authority to distribute the gains is provided for in the terms of the trust or the trustee has established a pattern and practice of distributing capital gains in the course of administering the trust and in accordance with state law.

[tuteurjohn]

Thank you for the prompt reply.  I also noted that the accounting income worksheet has been filled out for the first time which I do not recall seeing in prior years.  I have filed in Turbotax before and never had any dividends allocated to the trust.  Also I have never had capital gains deducted from the income distribution deduction.  How can I override those two elements?

[tagteam]

Ensure that you allocate capital gains to the beneficiaries and to income (not typically for a simple trust, though).

In the Distributions section, ensure that you make a distribution of the total (percentage to each beneficiary).

You can check this in Forms Mode on each K-1. Look at the Beneficiary's Allocation Smart Worksheet.

[Mike9241]

this reg converts your simple trust into a complex trust

§ 1.661(a)-1 Estates and trusts accumulating income or distributing corpus; general.
Subpart C, part I, subchapter J, chapter 1 of the Code, is applicable to all decedents' estates and their beneficiaries, and to trusts and their beneficiaries other than trusts subject to the provisions of subpart B of such part I (relating to trusts which distribute current income only, or “simple” trusts). A trust which is required to distribute amounts other than income during the taxable year may be subject to subpart B, and not subpart C, in the absence of an actual distribution of amounts other than income during the taxable year. See §§ 1.651(a)-1 and 1.651(a)-3. A trust to which subpart C is applicable is referred to as a “complex” trust in this part. Section 661 has no application to amounts excluded under section 663(a).

if the trust distributed capital gains subpart C applies. it's a complex trust for the year

with a complex trust, you get a deduction only for the actual distribution during the year based on accounting income and allocated between ordinary income and capital gains.

we can see the return so can't be sure whether you distributed more than ordinary accounting income (ie corpus) or answered some questions incorrectly 

[tuteurjohn]

Many thanks for the helpful response.  I have filed this return manually  as a simple trusts in years past because the trust instrument requires all income including capital gains to be distributed annually.  

Is there a way to convert Turbotax to where it allows me to enter data manually or do I have to go back to the pre-Turbotax days of manually entering the data on downloaded IRS forms?

[tuteurjohn]

Many thanks for the help.  I tried using both the K-1 worksheet for the K-1 from the parent trust and the Distribution worksheet for the K-1 to this trust's beneficiary.  Both got hung up on K-1 box 7 rental real estate income from the parent trust.  Unless I can figure out how to use Turbotax as just a manual entry application, I will go back to downloading IRS forms and working on those.

[tagteam]

You should be able to do virtually anything you can do with the actual forms, that you would download from the IRS web site, in Forms Mode in TurboTax Business. 

[tuteurjohn]

I very much appreciate the community being there to help us neophytes.  Wrestling with the algorithms behind Turbotax business is exhausting.  Because Turbotax does not recognize the ability of the trustee to make certain decisions such as allocating capital gains to the beneficiary and not needing to do accounting income, it is much simpler to just go back to the IRS forms and fill them in.  As an example preventing the trustee from allocating $2100 in capital gains to the beneficiary per the trust document would have caused an $1800 tax bill for the trust if the capital gains had remained with the trust.

I did manage to complete two 1041s in Turbotax which somehow did not trigger the Turbotax meddling.