Dividends discrepancy on K-1

[Anonymous_]

---

@jtax wrote:

One thing you could do as trustee (using your example of $41k in dividends and a $3k capital loss) is not to distribute $41k (if the trust instrument gives you that discretion) in that tax year. Instead distribute $38k or something less. Say $38k.

---

That is a decent solution, assuming the trust does not require that all income be distributed currently.

However, the "zeroed out" result is at the expense of the beneficiary in the sense that the beneficiary receives a distribution that is $3,000 less.

[jtax]

---

However, the "zeroed out" result is at the expense of the beneficiary in the sense that the beneficiary receives a distribution that is $3,000 less.

---

Yes that is true in that tax year. But the bene could get that back in the next tax year (again if the trust instrument grants the trustee sufficient discretion). This could be a don't distribute in December but do distribute in January kind of thing.  And of course these are very small numbers and likely an over optimization. However the OP wanted to understand the basic concepts and options.

[Anonymous_]

Understood, which distribution would be corpus unless there was income in the following year, in which case it would be passed through to the beneficiary (to the extent of DNI).

Regardless, if you read the original post, you will note that this thread has morphed into something completely unrelated to that issue (which was how it could be possible for qualified dividends to exceed ordinary dividends - which is not possible).

[Steelydan989]

This all does relate to my original question. My understanding from answers earlier in the thread was that I could not offset taxable income in the trust with its $3,000 loss carryover if I was also distributing taxable income to the beneficiary. Is this not the case? (The taxable income I'm referring to is all dividend income.)

[Anonymous_]

---

@Steelydan989 wrote:

This all does relate to my original question.

---

Actually, it does not. Your original question was:

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?

As I stated, this thread has morphed from "paying out all taxable income" and "greater qualified dividends than ordinary dividends" (which I stated was not possible) to you stating that you did not have to pay out all income and why the $3,000 in capital loss was ostensibly lost to whatever this is now.

Regardless, I believe @jtax indicated that if you withhold $3,000 of the income distribution (so you would distribute $38,000), then the $3,000 capital loss would wipe out the $3,000 of dividend income that was not distributed. As I stated much earlier, if you distribute all of the dividend income, that result would not obtain.

[Anonymous_]

---

@Steelydan989 wrote:

We're paying out all taxable income to the beneficiary. 

---

The above-quoted statement is yet another (unaddressed) issue that has been left behind (somehow).

The quote is from the original post on March 9th. Assuming the trust is a calendar year taxpayer (which virtually all are), then March 9th would be too late to make a distribution to a beneficiary, for the 2021 tax year, without the trust having to pay all of the tax on the taxable income the trust received in 2021.

March 9th would be past the date allowed for the trust to make a Section 663(b) election (to have the distribution treated as if it were made in the 2021 tax year) so this entire discussion has been rendered moot, at least for the 2021 filing period.

[Steelydan989]

There seems to be a misunderstanding here. I asked the question while working on the return as it involved how much taxable income would need to be attributed to the beneficiary on the K-1. My question did not reflect the date I distributed assets to the beneficiary. (I distributed more than enough to cover the taxable income prior to the deadline for 2021.) This issue seems to have gotten more complicated and confusing than intended.

Here was the question: The trust's only income was $41,000 of ordinary dividend income, $40,000 of which were qualified dividends.  It also had $3,000 capital loss carryover. My question was, can the trust allocate $38,000 taxable income to the beneficiary and have the $3,000 loss carryover offset the remaining income in the trust, thereby leaving no taxable income in the trust? If the answer to this is no (as you initially indicated), no further discussion here is necessary. I understood this to be your answer and I filed the return accordingly. If the answer to this however is yes, my next question is, then what qualified dividends would be attributed to the beneficiary on the K-1 since it wouldn't be the full $40,000? The answer to this is still of interest to me as I file this return every year and want to understand how it works.

[Anonymous_]

Distributions require planning to optimize (minimize) tax liability.

If this were a "simple" trust (all income is required to be distributed, whether distributed or not), then you would not be able to allocate less than the entire amount of the dividend income received (i.e., $41,000 would be deemed to be distributed and reported on the K-1).

However, it appears as if this trust is not a simple trust (i.e,, you have the discretion as to how much, if any, income to distribute). Therefore, you could have managed the distribution as you saw fit, and in a manner that optimized results, during the 2021 tax year (or within 65 days after the close if you made a 663(b) election). Instead, you purportedly distributed all of the income ("more than enough") to the beneficiary prior to the end of 2021. As a result, a different (lower) figure (e.g., $38,000) cannot be allocated to the beneficiary at this point; the actual distribution of all of the income has the effect of passing all of the DNI ($41,000 here) to the beneficiary.

[Steelydan989]

You are correct that this is not a simple trust but is a complex trust. So, for future reference, you're saying I could have allocated $38,000 taxable income to the beneficiary and offset the remaining $3,000 in the trust with the loss carryover? If so, (and I'm wondering why this question has not been answered yet): What figure for qualified dividends would be entered on the K-1? 

[Anonymous_]

---

@Steelydan989 wrote:
 What figure for qualified dividends would be entered on the K-1? 

---

I hope you are into math.

You would divide 38,000 by 41,000 which results in .926829 (38,000/41,000 = .926829).

Multiply.926829 by 40,000 (the qualified dividend amount) which results in 37,073 (.926829 x 40,000).

$37,073 of the qualified dividends are reported on the K-1 and $2,927 are allocated to the trust (37,073 + 2,927 = 40,000).

NOTE: I am assuming you realize there is no loss carryover with this distribution as you are using the $3,000 loss to offset part of the dividend income.

[Steelydan989]

Wonderful, thank you! This answers my original question. Again, I appreciate your time and assistance on this.

[jtax]

---

@Steelydan989 wrote:

You are correct that this is not a simple trust but is a complex trust. So, for future reference, you're saying I could have allocated $38,000 taxable income to the beneficiary and offset the remaining $3,000 in the trust with the loss carryover? 

---

(emphasis added)

Just to be clear here. You could have distributed $38k (not $41k like you did) to the bene and then offset the other $3k of trust income will the capital loss. (using the calculation @Anonymous_ walked you through to allocate the qual divs -- TT business will do that calc for you). [Assuming the trust allows you to do so, as it appears from your description.]

Sometimes you can just allocate (without distributing) income or deductions to a bene, but are special circumstances and I don't think they are common. (E.g. amounts permeantly set aside for charitable purposes).