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Distribution to the beneficiary
I'm stuck in discretionary distribution as TurboTax stated from the following link. https://turbotax.intuit.com/tax-tools/tax-tips/IRS-Tax-Forms/What-is-a-Schedule-K-1-Form-1041--Estat.... The link stated that "If the income distribution is discretionary, meaning the trustee or estate administrator has authority to decide whether beneficiaries will receive distributions, the payments aren’t deductible on 1041 and are not reported on Schedule K-1. The trust or estate is responsible for paying the income tax on these distributions, not the beneficiaries."
However, my accountant insisted that no matter the character of the distribution, if the trustee distributed to the beneficiary, then it will be taxable on beneficiary's individual tax return. Is this correct?
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The FAQ appears to be wrong. Distributions from the estate to beneficiaries come first from the income received by the estate during the estate's tax year (Distributable Net Income or DNI). Any amount of taxable DNI required to be distributed currently (tier 1) plus any additional amounts of income actually distributed (tier 2) to beneficiaries are reported as an income distribution deduction on the estate's tax return and are reported via the Forms K-1 to beneficiaries for taxation on the beneficiaries' individual tax returns. The income is only taxed once, either on the estate's income tax return because income not required to be distributed was retained, or on the beneficiaries' tax returns because the income was distributed or required to be distributed.
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In brief, the trustee accidentally put property in its management company's QB (3 trust are the partners of this management company and they are the only partners), but the actual investors are the beneficiaries and not the management company. Accordingly, the accountant recognize this as property distribution to the beneficiary, but when I file 2014 1041, I did not enter the distribution (property distribution) since it was mistakenly entered in management QB. Was this a wrong tax treatement? Thank you for your answer!!
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seadrag76, if the property was owned directly by the individuals and not by the estate/trust, what does the trustee have to do with this property? If the property is not part of the estate/trust, it seems that the trustee simply make a bookkeeping error that needs to be corrected and the estate/trust did not receive or distribute any income having to do with this property.
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Given the complexities of trusts, it might be best to have this gone over by a local tax professional. This is getting way off of the topic of the original question here.
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Retirement tax questions
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Following your response that distribution from a trust principal is not reported on Schedule K-1... I thought the trust needs to inform the IRS who it distributed principal to and how much. If so, where is it reported if not on Schedule K-1? By the way, in my process of completing the tax return for the trust and the schedules K-1, I noticed an entry on the K-1 for AMT adjustment. Does this take care of the distributed principal?
Thanks
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"Following your response that distribution from a trust principal is not reported on Schedule K-1"
The Schedule K-1 reports items of income, deductions and credits that are necessary for the beneficiary to complete the beneficiary's tax return. Nontaxable amounts distributed are not reportable on the beneficiary's tax return.
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Does this mean the principal in an irrevocable trust is not considered a taxable income for the beneficiary regardless of the amount?
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The only amounts that are taxable income to the beneficiary are those that would be taxable to the trust if they were retained by the trust instead of being distributed.
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Reading through this thread I get partial answers. I'm dealing with an irrevocable trust and understand that if any current year income is distributed, it is reported on a K1 and the beneficiary has to report it on their taxes and pay tax. I also understand that if trust principal is distributed, it is at the discretion of the trustee and that this is not taxable to the beneficiary since tax has already been paid on this money. The definitive answer I'm looking for is (1) does the trust have to report a distribution of principal and if so, on what form and (2) does the beneficiary have to report the distribution of principal and if so, where on form 1040? Someone answered schedule B, line 10 but that is obviously incorrect as there is no line 10. If anyone can answer, I would appreciate it, thanks.
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Line 10 of Schedule B (Form 1041), not Schedule B (Form 1040).
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Thanks for the quick reply, duh, I misread, you clearly responded form 1041. Looking at this form, I assume distribution of principal qualifies as "other amounts". So does the beneficiary report anything? One other question that I believe is obvious but will ask anyway, if current year income is distributed and a K1 is issued for that amount, does the money actually have to be paid/transferred to the beneficiary or can the beneficiary elect to leave it in the trust, even though they are responsible for paying the tax? Many thanks.