I am using Turbotax business to fill out form 1041 for a simple trust. The trust had ~$69K of income in 2024, which is to be distributed to the trust beneficiary. My expectation wass that the entire $69K of income would be allocated to the beneficiary's K-1 form generated by turbotax. And this is what happens if in the deduction section I indicate that the trust paid no state or local taxes in 2024.
However, the estate had a very large capital gain in 2024, and paid out about $34K in state taxes to cover the state capital gain tax. When I enter this amount in the deductions section, turbotax immediately reduces the amount of income distributed to the beneficiary's K-1 form by the same $34K, and makes the trust is liable for taxes on the 34K of income that is not distributed (while taking a $10K deduction for the state taxes paid when calculating the estate's tax liability).
I can find nothing in the form 1041 IRS instructions that explains why turbotax would change the amount of income distributed on the K-1 it produces as a result of a state and local tax deduction. Is this a bug in turbotax? If not, can someone point me to the tax law that justifies (or requires) that maneuver?
Also, is there a way to override turbotax's income distribution calculation? If I simple don't report the state taxes paid, I get the K-1 form I need, but the estate itself doesn't benefit from the $10K portion of the state taxes paid that can be deducted from the estate's income.
Thanks.
-Pete
