A Health and Education Trust lists a charity as "The 'Charitable beneficiary' of my trust". When filling out the Federal 1041 in TurboTax Business:
1) Is the charity entered as a Beneficiary under the General Info: Beneficiary Information section and then checked as a Charity? With the income distributed to the Charity entered under the Federal Taxes: Distributions section.
or
2) Is the distribution to the Charity entered under the Federal Taxes: Charitable Deductions Section?
When the charitable contribution is tracked as a beneficiary, a K-1 is created, and the portion of taxes is passed to the charity which is not required to pay taxes. The distribution is then captured in Schedule B, line 9 of 1041, increasing the Income Distribution Deduction. In this case, the maximum "deduction" is the income of the trust (if 100% of the income was distributed to the charity). Note: It also takes any foreign tax reduction with it. If there are any capital gains of the trust, any amount greater than the trust income does not reduce the trust's taxes on the capital gains.
When the charitable contribution is tracked as a deduction, the information is entered into Schedule A Line 1 of 1041 increasing the charitable deduction. This reduces the trust's distributable net income. If the deduction exceeds the trust's income, it can then reduce the taxes due on the capital gains of the trust.
It appears it is better to record the charitable donation as a deduction and not a beneficiary distribution, but I am not sure if this is acceptable or appropriate.
Thoughts?
