Buggy Trust 1041 Tax Software when generating a K-1 for an Inherited IRA

[trust812]

I am using H and R Block tax software to generate a 1041 K-1 for an Inherited IRA Distribution. When I fill out Line 5 - Other Portfolio and Nonbusiness Income ($40,000) for the Inherited IRA distribution then the software is automatically filling in Line 14 Other Information with Code E - Net Investment Income ($40,000) and Code H - Adjustment for Section 1411 Net Investment Income or Deductions (-$40,000). This doesn’t make sense to me and I think it’s a bug in the software! When I use the K-1 including Line 5 and Line 14 codes E and H in the 1040 Tax software there is a warning message that Codes E and H are unsupported. The Box 5 $40,000 gets transferred to Schedule E as I expected. I really think it’s a bug with the 1041 K-1 software and codes E and H should not have been used for an IRA distribution. What do you think? Maybe my biggest mistake is using H&R Block software instead of TurboTax!

[M-MTax]

Should be standard behavior. Line 14E is net investment income for the purposes of, among other things, whether you qualify to deduct investment interest while Line 14H appears on Form 8960 but only if that form is needed for your return.

[trust812]

But my understanding is that a traditional IRA Distribution is not Net Investment Income. A 8960 form was also generated and everything on it is 0 except Line 19a - Adjusted Gross Income which is -$100 and Line 19b - Highest Tax Bracket for Estates and Trusts which is $15,200. This Trust 1041 should be very simple because the only activity this year was the distribution from Inherited Traditional IRA which is passed through to the 3 Beneficiaries via K-1’s. The total amount distributed was $105,000, $35,000 to each of the 3 Beneficiaries but I made my example here simple in my initial post and rounded the $35,000 to $40,000. If you think both the E and H codes on line 14 is not a bug in the 1041 tax software than maybe it is a bug in the 1040 tax software because a warning message that they aren’t supported was displayed. Is form 8960 even needed and if I don’t include it and leave line 14 blank will it raise any flags to the IRS? Thanks!

[M-MTax]

If your MAGI is greater than the threshold, then the software is going to generate an 8960. 

A negative amount on Line 14H is a negative adjustment to your MAGI so it shouldn't count for the purposes of the NIIT.

[trust812]

So do you think that the “not supported” warning message for codes E and H on line 14 of the Trust K-1 is a 1040 software bug in the H&R tax software when it tries to use the Trust 1041 K-1 information? 

Just curious…does TurboTax Trust tax software also populate Line 14 codes E and H on the K-1 for the same situation?

Thanks again! 

[M-MTax]

So do you think that the “not supported” warning message for codes E and H on line 14 of the Trust K-1 is a 1040 software bug in the H&R tax software when it tries to use the Trust 1041 K-1 information? 

It's definitely possible but you'd have to contact someone at H&R Block to confirm. It's also early in the filing season so maybe there will be a software update to rectify that issue.

Just curious…does TurboTax Trust tax software also populate Line 14 codes E and H on the K-1 for the same situation?

I think so. I'm pretty sure TT would populate those lines in that situation. If they're not needed from the K-1 in the 1040 software, then the figures won't be used.

[trust812]

“It's definitely possible but you'd have to contact someone at H&R Block to confirm. It's also early in the filing season so maybe there will be a software update to rectify that issue.”

I suppose that’s a possibility but it’s kind of hard to believe that this would be a new bug when H & R Block Tax software has been around for many years which would lead me to believe that this bug was around in their tax software for previous years.

[M-MTax]

I understand. Perhaps it's a matter of being inartfully worded in that the language wound up being "not supported" when it maybe should have been "not needed" or "not necessary".