I made final distribution of trust principle and accumulated income.
In prior years, there were no distributions.
In prior years, Trust filed 1041 returns for all income.
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If the Trust has made payment on income which now, net of the tax, has been accumulated in the corpus (body or principal) of the Trust, it is no longer income but principal and a distribution of principal is not a tax event. However, on Form 1041 in the Final Year, you would enter the total of all non-obligatory distributions made, including the principal and this will appear on line 10 of Schedule B of Form 1041. The distributed amounts will appear on the respective Schedules K-1 for the beneficiaries, and again, a distribution of after-tax monies would not appear in line 1-8, where there are tax liability, but instead in line 11 for Final Year Deductions allowable to the beneficiaries, or line 14 if tax-exempt income received. Principal distributions do not actually appear on the Schedule K-1 since they are not relevant to Income Tax.
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