Amount distributed is more than trust accounting income

[hntrust]

Actual amount distributed to beneficiary is greater than the trust accounting income calculated by Turbotax. Does this mean that I should enter on the next screen the trust accounting income as tier 1 and the amount that exceeds trust accounting income as tier 2? What effect if any does this have on the amounts shown on K-1? Do the tax rules just consider this a distribution of principal?

[tagteam · Accepted solution]

" Do the tax rules just consider this a distribution of principal?"

Yes. The entire distribution is second tier since you have a zero, or a negative number, on Line 17 (your trust's AGI). As such, all trust income has been offset by trust expenses (deductions) and principal is all that remains to be distributed.

[hntrust]

I was mistaken in stating previously that accounting income was negative. I was referring to line 22 Taxable Income as being negative. So then line 17 is actually positive which is the tier 1 income and the difference between tier 1 income  and the actual distribution is entered in the program as tier 2. Am I correct? Sorry for my confusion. Thank you.

[tagteam]

Yes. Once tier 1 is "full" (to the extent of DNI), the remaining distribution is tier 2.

[scooter123]

@tagteam , I have a question about this topic.  I have a trust that also distributed more than its DNI for 2017.  I also had this situation two years ago, when a CPA did my return.  The CPA didn't put the excess distribution into Tier 2.  She just put the entire DNI into Tier 1 and said any excess didn't matter.  I guess effectively she's right:  It didn't matter because the sole beneficiary of the trust received a K-1 containing the DNI, and the trust paid $0 taxes, which would have been true either way.  But I still like to get everything correct.  Can you please confirm that the excess distribution should actually be a Tier 2 distribution?  The other interesting thing to note is that in previous years, during error check, TurboTax Business for federal flagged this situation, saying "Since this is a complex trust, and total distributions are more than accounting income, you need to prepare schedule J."  This year (2017) it doesn't do that.  However, TurboTax Business for California continues to flag this situation in this manner.

[tagteam]

@scooter123  - Generally, first tier distributions are distributions of income required to be distributed currently, whether they are actually distributed or not. Second tier distributions are, essentially, **all other** distributions so it appears as if the "excess" is, in fact, second tier (as you indicated, not that it matters in this particular instance).

Re that error check, I am not familiar with trust taxation in California but, with respect to federal income taxation, Schedule J is only used to report an accumulation distribution for certain trusts that were treated foreign trusts and certain trusts that were created before March 1, 1984.

[taxbattler]

I'm trustee of a trust that has a 3% unitrust required distribution.  It usually exceeds accounting income and DNI.  From your previous response, the amount of accounting income would be tier 1 and the excess would be tier 2 even though it is not discretionary.  One response above was that you didn't have to enter a tier 2 amount because it wouldn't matter.  If I don't enter the excess distribution in tier 2, then Box 12 on the K-1 does not have a number in it.  But if I do enter a tier 2 amount then there is an AMT Adjustment in Box 12.  Since the amount greater than accounting income would seem to be a distribution of principal, it doesn't seem that there should be anything in Box 12.  So I'm wondering if I should put anything in tier 2.

[socalengr]

This answer is incorrect. You are mixing up income and principal. It is correctly answered here: Solved: The FAQ appears to be wrong.  Distributions from the esta... (intuit.com)