1041, distributions and K-1s

[Fiddle]

I am the executor for my father's estate and I have a few questions on the 1041.

I distributed a large portion of the estate's corpus in 2024 but I did not include any income in the distribution. The decedent's will does not require income to be distributed so I held off distributing income.

The estate had some tax exempt income, and capital gains thus creating a situation where there is no income available to be distributed to beneficiaries except tax exempt income. 

For 1041 Schedule B

Line 1 (total income) is $63546 

Line 2 (tax exempt income) is $3279 

Line 6 (Capital gains as a negative number) is -$67987 

Line 7 (distributable net income) is $0 since all taxable income is essentially capital gains 

Line 9 (income required to be distributed) is $0 

Line 10 is asking for other amounts paid, credited or otherwise required to be distributed. 

If I enter the corpus value distributed on line 10 of 1041 Schedule B, it generates a K-1 for each beneficiary with $0 taxable income and $1093 of tax exempt income (line 14A) as well as a portion of foreign tax paid (line 14B). 

My siblings are foreign non residents and do not want a K-1 and thus the complexity of filing a 1040-NR so they have requested that all taxes be paid by the estate. 

My questions

1. Do I have to enter the full amount of the distribution (basically the corpus amount) on line 10 above or do I only have to report the income portion of the distribution which is $0. The K-1 will be all 0s if I only enter the $0 income portion of the distribution.

2. If I do have to enter the full amount on line 10, will my siblings have to file a 1099-NR if their only income is the tax exempt income reported on the K-1. 

3. I do not understand why the K-1 line 14B would show foreign taxes paid since the estate will receive the credit and it will not be passed on to beneficiaries.

Thanks in advance for your help

[DaveF1006]

Yes, According to the IRS instructions for Form 1041 and Schedule B, you need to report the full amount of the distribution on line 10, which includes both the corpus and income portions. Even if the income portion is $0, the full distribution amount should be entered.

According to this IRS source, non-resident aliens are not required to file a NR for the following interest sources, unless withholding was taken, credit for the withholding, and/or refunds of the withholding may be available

1. U.S. bank
2. A U.S. savings and loan association
3. A U.S. credit union
4. A U.S. insurance company
5. Portfolio Interest (Described in “3. Exclusions From Gross Income" – “Nonresident Aliens” - "Interest Income" and its subsection "Portfolio interest" of Publication 519, U.S. Tax Guide for Aliens)

For the foreign taxes, go to the K-1 Worksheet and remove the Foreign Taxes in line 14B so this isn't passed to the beneficiaries.

[Fiddle]

Thanks for your reply @DaveF1006.

I went ahead and entered the entire distribution as you suggested on line 10 of Schedule B which generated amounts in Box 14A (Tax Exempt Income) and 14B (Foreign Tax Credit) on each beneficiary's K-1

I have a follow up question regarding the impact to the non resident alien beneficiaries.

I filled out a test 1040-NR for my siblings to see what would occur based on the K-1 and the1040-NR  schedule NEC is all zeros and tax due is zero since the income was tax exempt income. Based on this I assume they do not have to file a 1040-NR nor do I need to issue a 1042-S for each of them. Please confirm that you agree.

Interestingly the foreign tax credit was not taken on the 1041 as I expected but instead was passed on to the beneficiaries. Based on this I assume that I as a US citizen can claim it on my 1040 but my siblings are not required to file a 1040-NR to claim theirs and can simply forego it. Please let me know if my assumptions are correct. 

Thanks in advance. I appreciate your expert opinion.