We have a complex trust where we took a tier2 partial annuity withdrawal to the trust. The funds were then distributed to the beneficiary. I have input the income on Box 8 as Ordinary income from 1099-R Box 2a, State taxes on line 11a, and Federal taxes on Schedule G Part II line14 with the box checked off. The state taxes are deducted from income correctly, but I am missing something as it indicates a refund of Federal taxes to the Trust and doesn't pass this on to the beneficiary. (Shows Distributable net income with no federal taxes deducted), which then creates an incorrect K1 for the beneficiary showing it received a bigger distribution than the actual. How do I correct this? Thanks.
Other than backup withholding as mentioned by tagteam, credit for taxes withheld from a distribution paid to the trust is not permitted to be passed through to trust beneficiaries on Schedules K-1. Excess tax withholding must be refunded to the trust. Because of this, the beneficiaries might have underpaid taxes during the year.
Thank you for the reply and link to IRS doci.
So if I am understanding this correctly..... The 1041 will have the "incorrect" Distributable Net income amount, but by inputting the Federal Tax withheld in Line 13 box B on the K-1 worksheet, this will pass the Credits and recapture of the tax amount already paid on to the beneficiaries K-1.
No. What was withheld was not backup withholding, so it is not to be reported in box 13 with code B. See What is backup withholding:
https://www.irs.gov/businesses/small-businesses-self-employed/backup-withholding
Also, not being able to pass through the credit for the tax withholding does nothing to invalidate the amount of DNI shown on the Form 1041.