Taxable vs Tax exempt trust deductions

[bnap411]

1041 complex trust final year.

In listing the expense deductions; trustee fees, professional fees, and other itemized deductions, a questions is asked it the amount paid is contributed to taxable, tax exempt, or both.  How do I determine this?   

[bnap411]

This response is unclear to me.

[bnap411]

100% of the income to the trust is taxable.  So do I allocated all expenses to taxable income.

[Anonymous_]

Yes. The answers (relating to allocation between tax-exempt and taxable income) only apply if you have tax-exempt income. Since all of the income is taxable income (there is no tax-exempt income), you allocate all expenses to taxable income.

[jgs1947]

On Page 2 of my 1041 under Other Information, the answer to the first question:  Did the estate or trust receive tax-exempt income?  TT is coming up with a "Yes," however, I am being taxed on Capital Gains Distributions.  Why would this be?  This has always been a "No" on my past returns.

[Anonymous_ · Accepted solution]

"How do I determine this?"

Typically it is a simple matter to make the determination; either the fees/expenses are all attributable to taxable or tax-exempt income or they are not and an allocation must be made. 

The allocation is based on the ratio of tax-exempt income to taxable income. For example, if you have tax-exempt income of $1000 and taxable income of $2000, then one-half of your, otherwise allocable, expenses would be allocated to tax-exempt income and disallowed while one-half of your expenses are allocated to taxable income and are deductible (see attachment).

TurboTax will make the appropriate allocation for you if you enter expenses as being allocable to Both taxable and tax-exempt income.

[RichardG]

If the trust owns tax-exempt bonds, a portion of the investment expenses must be allocated to those bonds and cannot be deducted.  For example, if 10% of the trust's investments consist of tax exempt bonds, then allocate 10% of investment expenses to those bonds.