Dividends discrepancy on K-1

[Steelydan989]

I'm working on Form 1041 for a trust. The total ordinary dividends (the only income) is $2,000 more than qualified dividends. The capital loss (Line 4) is $3,000 so the total income (Line 9) shows ordinary dividends reduced by $3,000. We're paying out all taxable income to the beneficiary. In creating the K-1, since ordinary dividends have been reduced by $3,000, the resulting amount is greater than the qualified dividends. I'm assuming it's a problem if the K-1 reflects greater qualified dividends than ordinary dividends. How can I resolve this?

[Anonymous_]

Make sure the qualified dividends are allocated to the beneficiaries. You may have to use Forms Mode.

[Steelydan989]

Thanks. The only income is ordinary and qualified dividends and we're attributing the loss carryover of $3,000 to the ordinary dividends. How will this affect the qualified dividends amount? If the $3,000 is subtracted from the ordinary dividends, the qualified dividends would be greater than the ordinary dividends on the K-1 which I assume is a problem, yes? 

[Anonymous_]

What are the actual numbers? Can you post them?

The qualified dividends are merely a subset of the ordinary dividends and should be reduced to the extent ordinary dividends are reduced.

[Steelydan989]

For example, if the ordinary dividends are 41,000, qualified are 40,000 (and are allocated to the beneficiary on the 1041) and the loss carryover is 3,000, the ordinary dividends to be paid out to the beneficiary as shown on the K-1 would be 38,000. But what amount for qualified dividends should end up on the K-1? The qualified dividends can't be larger than the ordinary dividends.

[Anonymous_]

I understand now (I believe I do, at least).

If there is one K-1 (and you are distributing all of the income, which are only dividends), then it would show $41,000 as ordinary dividends (Line 2a) and $40,000 qualified dividends (line 2b).

The $3,000 loss would have no impact if you are distributing all of the income.

[Steelydan989]

Thank you. So what happens to the $3,000 loss? Can't the trust use the loss to reduce its taxable income before distributing the reduced income to the beneficiary? If not, can the trust pass the loss onto the beneficiary as well? Who gets to use the loss?

[Anonymous_]

There should be a carryover.

Regardless, the trust cannot pass the loss through to the beneficiary unless it is filing its final return.

[Steelydan989]

Does that mean, as long as the trust is paying out taxable income to the beneficiary, the loss carryover goes to waste? There are currently short term and long term loss carryovers totaling about $30,000 and we'd like to use the $3,000 loss limit. How can we gain benefit from the loss carryover each year but not have the trust pay any tax? Just to make sure my question is clear: if we reduce the trust's taxable income (only dividends) by the $3,000 loss carryover and distribute the remaining taxable income to the beneficiary, that means the $41,000 of ordinary dividends is reduced to $38,000 and paid to the beneficiary. The K-1 will indicate $38,000 of ordinary dividends to the beneficiary. However, how do the qualified dividends ($40,000) get adjusted since they're now greater than the ordinary dividends?

[Anonymous_]

The maximum ($3,000) loss can be used to offset income (or gain) that remains in the trust.

Otherwise, any loss would generally be carried forward until the final return is filed for the trust (at which point the total net losses could be passed through to the beneficiary(ies).

[Anonymous_]

I just noticed you edited your post to include a hypothetical.

Note that you (presumably the trustee) must follow the governing document (terms of the trust) when making (or not making) distributions. Further, state law controls in certain instances and federal (tax) law comes into play when you try to minimize income tax by using arbitrary procedures (i.e., that do not have substantial effect other than their tax effects).

Regardless, if the total ordinary dividends are reduced, then the qualified dividends should be reduced in the same proportion.

[Steelydan989]

Okay, I think I've got my question answered. Thank you for your help.

[Steelydan989]

Reviewing the answers here again, I realize my question hasn't been answered. I, as trustee, am paying out all taxable income to the beneficiary, as calculated on the 1041. The total income this year consists of only ordinary dividends minus $3,000 capital loss. As mentioned in my example above, if ordinary dividends are 41,000, the Total Income will be $38,000 and will be indicated as such on the K-1. If the qualified dividends were 40,000, this is greater than the $38,000 of ordinary dividends being paid to the beneficiary. How do the qualified dividends to be entered on the K-1 get calculated? Will they be reduced by $3,000 as well?

[Anonymous_]

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@Steelydan989 wrote:

Reviewing the answers here again, I realize my question hasn't been answered.....

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I am starting to realize that you are probably not using TurboTax Business but, perhaps, are trying to prepare the 1041 and K-1 manually (which is a terrible idea).

As stated earlier, a capital loss cannot be passed through to the beneficiary(ies) until such point when the trust is terminated and a final return is filed.

[Steelydan989]

Thank you. Regardless of the software I'm using, I'm seeking to understand the overall concept. I am to pay out only the taxable income to the beneficiary, not all income. Are you saying that a trust's taxable income cannot be reduced by its capital loss carryover each year (up to $3,000) before being passed to the beneficiary? I wouldn't think the beneficiary would have to pay tax on more money than the trust would have. If this is the case, how is the benefit of the capital losses ever realized?