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Does that mean, as long as the trust is paying out taxable income to the beneficiary, the loss carryover goes to waste? There are currently short term and long term loss carryovers totaling about $30,000 and we'd like to use the $3,000 loss limit. How can we gain benefit from the loss carryover each year but not have the trust pay any tax? Just to make sure my question is clear: if we reduce the trust's taxable income (only dividends) by the $3,000 loss carryover and distribute the remaining taxable income to the beneficiary, that means the $41,000 of ordinary dividends is reduced to $38,000 and paid to the beneficiary. The K-1 will indicate $38,000 of ordinary dividends to the beneficiary. However, how do the qualified dividends ($40,000) get adjusted since they're now greater than the ordinary dividends?