Retirement tax questions

While the Form 1041 TurboTax Federal interview is reasonably complete, there are a few places where the unsuspecting preparer with limited experience may find results not as expected. 

• First PDF  Form 1041 Allocations to Beneficiary K-1 
  is example of a non-terminal year, when gains are not distributed.
• See SECOND PDF Form 1041 FINAL YEAR Allocations to Beneficiary K-1
        re: FINAL year of Filing Form 1041 and allocation of all income, gain, expenses, and credits
  

The major omission that seems to occur is, after all income and expenses are entered and seemingly a Schedule K-1 should be complete, income items on the K-1 are not present.  See the attached PDF and walkthrough the places that the preparer of the Form 1041 and Schedule K-1 must check for completeness, as some times transfers are not automatic for lack of one or another entry being made.

FIRST PDF - A non-terminal year filing Form 1041

1. Generally, most states do not provide or allow for a Trust to allocate capital gains to any beneficiaries except in the final year of the Trust when it is liquidated or terminated.  Estates can distribute principal and gain through the years of administration.  So the allocation issue is critical. 
   
2. As said, most states do not allow gains to be allocated to the beneficiaries, and in fact will assess tax on the capital gains (state income tax) irrespective of any attempt at the Federal level to allocate principal to beneficiaries.
3. Allocations have been made
4. A Simple Trust must allocate all Ordinary Income to beneficiaries; a Complex Trust frequently does according to the provisions of the trust.
5. Distributions can be allocated by percentage amongst the beneficiaries or alternatively by explicit amounts, as stated in the provisions of the trust document. 
6. Example has a single beneficiary receiving 100% of Ordinary Income
7. CRITICAL Checkpoint - Several calculations of a trust's income:
   "Accounting Income"  - Amount of total income that is possibly allocable to beneficiaries
   "Distributable Net Income" - Maximum amount of Taxable Income that can be distributed
8. Form 1041 the Schedule B - CRITICAL Checpoint - this is where an entry frequently is made
   Line 7 is the taxable portion of Total Income  - DNI Distributable Net Income
   Worksheet where the allocation of total income is shown and must be checked
   Line 9 - this is an entry carried forward from the screen stating actually how much was distributed
                this includes tax-exempt income as well as taxable
   Line 10 - if a Complex Trust, and if the trust provisions allow, principal may have been allocated
                  this is not a taxable transaction so there was no interview entry but line 10 must be manually entered.
9. -11  The produced Schedule K-1
          The check-off box in the interview

Second PDF - Final Year Filing Form 1041

1. In the very beginning of the interview at General Info - make certain to indicate this is the FINAL YEAR
2. In General Info, verify Final Return checked, and enter date when trust/estate closed
    Since this is the final year, whether or no previously a trust was a Simple Trust, in the final year
     when all assets are distributed including accumulated gain and principal, it is now a Complex Trust
3. Schedule D Part III - Line 18 preparer must verify and if necessary manual enter the accumulated gain to be 
           distributed to Beneficiaries. 
           If not certain review Schedule D  Line 16 
4. Form 1041 Schedule B 
   - Line 9  verify and/or manually enter the Ordinary Income from Line C above
   - Line 10 Preparer must manually enter the total proceeds of this final year of the trust/estate that
                   were actually distributed to the Beneficiaries. !!!!
5. Schedule K-1 complete and also see 7 - Distributable Income for Schedule K-1         

NOTE re: Capital Gains Taxation: 
As stated, most states do not provide that a Trust (as opposed to an Estate) can distribute gains and trust document provisions typically reflect this so that the gains are taxed, at both Federal level and State level, at the Trust and not the Beneficiaries.

In the Final Year, since it is at the discretion of the Trustee, gains may be retained for tax purposes within the Trust and be taxed at the Federal level and at the state level, OR all gains may be distributed to the Beneficiaries in which case the Trust will have no taxable income or gain, and all tax liability flows to the Beneficiaries.