Why is TurboTax for Business 2025 taxing both the Trust and the Beneficiaries, resulting in double taxation?

[GeneE]

This is my 7th year using TT for Business to file taxes for an irrevocable Trust. This year I am closing the trust and distributing income and what is left of the original principal to all the remaining beneficiaries. However, I am stuck on a big problem.

Schedule D (Form 1041) Part III is combing Columns 1 and 2 to produce a Net long-term gain in Column 3 on line 19. And that gain is more than twice the value of the actual Capital Gains from the sale of a rental property that was sold this year!

As the result, TT4B is creating a payment voucher for the Trust to be paid to the IRS. And, TT4B is also creating a K-1 for each Beneficiary that seems to be the correct DNI for each.

Bottom line. Why the double taxation? What am I missing?

[M-MTax]

I think you must have overlooked something in the program.

My understanding is you have to check some box that indicates the return is the final return. Also, you have to somehow in the program allocate capital gains to income and to the beneficiaries and then make a distribution of the entire amount. If you leave anything in the trust (i.e., amounts not distributed), the trust will absorb any tax due.

[GeneE]

It is specified as the final return. That was done in the introduction section, and it is reflected on the 1041 Form on checkbox under line F.

And, the Capital Gains are reflected appropriately on the K-1s being produced. 

As for leaving anything in the trust, I haven't. Rental income did not cover costs this year. Interest income is also relatively very small. Taxes were paid every year on the income, so the only thing that remains an asset is part of the original principal the Grantor provided when the Trust was funded years ago.

So, the Capital Gains on the K-1s reflect all the assets being distributed to close out the Trust. So, why is TT4B saying a tax bill equivalent to what is being distributed to the beneficiaries must also be paid by the trust? Why the double taxation? What haven't I entered? And where?

Do I need to enter what is left of the principal somewhere? It doesn’t cover the unexpected tax bill!

[M-MTax]

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@GeneE wrote:

Do I need to enter what is left of the principal somewhere? 

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Yeah, I don't know what's happening with the program, but you shouldn't have to enter the principal distribution anywhere. 

I only know that getting capital gains distributed out to the beneficiaries can be tricky with TurboTax Business.

[GeneE]

I was hoping the latest update from TT today would fix the issue, but it did not. 

For whatever reason the program continues to populate Schedule D such that the long-term capital gains for 2025 are assigned to both the Beneficiaries and the Estate/Trust. As I mentioned before, the result is Double Taxation!

I don't see anything under the income section of TT4B that I can change. I am claiming an inherited property (which occurred years ago) and I am getting the correct stepped-up basis.

Under Distributions, I am distributing the entire Distributable Net Income, which TT4B is stating is actually a little less than the Capital Gain and Total Accounting Income.  

 On Schedule D (and on the K-1’s), TT4B is adding the unrecaptured section 1250 gain to the Beneficiaries because I've specified that I am closing the Trust. But it has also buried the same amount on Schedule D owed by the Estate/Trusts for Capital Gains. 

I've tried tracing the Estate/Trust tax back to the other forms that populate Schedule D, but I can't figure out where the double counting starts.

[M-MTax]

OK, first thing is whether you allocated capital gain to income and to the beneficiaries.

I don't believe that's in the Distributions section, but in another section in the program. Once you do that, the exact amount should show up in the Distributions section.

[M-MTax]

If you've done the proper allocation to income and to the beneficiaries of your capital gains and are getting the same result, you should contact Support. Unfortunately, no one here can see your return and how you entered the data and it's also possible that there's a glitch in the software.

[GeneE]

The Income section has a something under it titled 'Home Sales' which has the correct capital gains amount for the sale of the rental. 

Just under that is "Allocation of Capital Gains". It is showing the capital gains amount times 2, plus the amount for section 1250 recapture tax. In other words, it wants me to allocate about twice the actual capital gains amount that was actually generated this year. I do not know where this is coming from!

However, when I stepped back through that section and allocated the whole amount being displayed to the Beneficiaries, Schedule D drops the allocation to the Trust. And, as expected the capital gains K-1s for the Beneficiaries double! 

In other words, now each of the beneficiaries are paying twice what they should, and with even larger tax ramifications in the for at least one family because it will increase their future Medicare payments my increasing their IIRMA tax. Forgive me for sounding like I am complaining. I do appreciate the help! But this is still not a good situation right now.

In summary, the result is one big positive step forward, but one big negative step backwards. However, maybe a hair closer to solving this!

[M-MTax]

I really don't know what to tell you because the program clearly should not be doubling the amount of gain realized for any reason. The only thing that comes to mind is some sort of input error.

You might want to transfer to Forms Mode and review the transaction(s) you entered. It's very difficult to troubleshoot this kind of error without being able to see the return (which is why I suggested Support earlier).

[GeneE]

Ok, I agree. I'm not sure of what else to do short of starting over. So, how do I contact support? I've never done that before. 

[M-MTax]

Support: https://ttlc.intuit.com/turbotax-support/en-us/help-article/account-management/turbotax-phone-number...

[GeneE]

Since it is the weekend and Support won't be available until Monday, I've dug into the forms again.

What seems to be happening is that TT4B believes I have 2 assets to tax.

The first one is from the 1099-S I received for the sale of the house that was originally inherited and then used as a rental. That generated form 8949 (and a slightly smaller capital gain than the second).

The second generates form 4797 (Sale of Business Property).

The two capital gains are then combined on Schedule D.

The first on Schedule D line 10, which shows the Sale Price, original basis when inherited years ago, the loss as a rental this year, and subsequent Gain from the Sale.

The second appears on line 14, which is plugged in by TT4B from Form 4797. Part III of that form takes the same property, sale price, original basis, cost of sale, etc. Then plugs in the IRS Section 1250 recapture tax. This results in a slightly higher capital gains rate, which I expected.

Unfortunately, instead of TT4B throwing away the first gain from form 8949 and simply using the higher gain (because I am closing the trust) from 4797, it adds them together on Schedule D. That "doubled" value then appears on the form 1041 line 10 as Total Income.

It is starting to sound like I may have answered a question incorrectly, which caused TT4B to think I am disposing of two assets. Or, there is a bug in the software.

[M-MTax]

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@GeneE wrote:

It is starting to sound like I may have answered a question incorrectly, which caused TT4B to think I am disposing of two assets.

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Yeah, I suspect that's the case and I doubt there's a bug to this magnitude in the software,

I can only suggest going back through the interview and ensuring that you input the correct data (and only once). I think you may have inadvertently entered the transaction twice somehow.

[GeneE]

Thanks for your help. It kept me going until I found the issue. 

There is a button under income labeled "Home Sales". I believed I was suppose use that to enter the sale of the rental property. That was incorrect since TB4B was already aware of the rental property from all the previous years that I had filed. Once I removed the data under "Home Sales" everything looked correct. No double taxation now. 

Merry Christmas!

G