Form 1041 Estate 1099-R Return

[AnnVV]

I am completing a 1041 for an Estate that received a 1099-R. I figured out where to enter the Gross Distributions but have the following questions:

(1) There was Federal Income Tax Withheld:

-I entered this under Other Tax Withholding and it shows up on 1041 30b Refunded

-I thought this gets passed as a credit to the Beneficiaries as a Credit on the K-1 - Is this correct or is this Refunded back to the Estate?

(2) For the "Distributions" do you put the actual Distribution amount which was "Distributions less the Tax Withheld amount" or is it the "Gross Distribution amount"?  The reason I ask is that on the K-1, the tax withheld is shown as a credit, therefore I wonder if the Distribution amount listed should be the Gross Distribution amount.

Thanks!

[DianeW777]

You have entered the tax withholding correctly.  It is not allowed to be transferred to the beneficiaries.  The estate will receive the refund.

• Except for backup withholding (see Form 1041 Instructions, page 34), withheld income tax can't be passed through to beneficiaries on either Schedule K-1 or Form 1041-T.

The distribution is the gross amount shown on the K-1 for the distributive share for each beneficiary and as distributable net income.

[AnnVV]

This is why I question Box 4 - Federal Income Tax Withheld (instructions Form 1041 exception):

Backup withholding. If the estate or trust received a 2021 Form 1099 showing federal income tax withheld
(that is, backup withholding) on interest income, dividends, or other income, check the box and include the amount withheld on income retained by the estate or trust in the total for line 14.

Report on Schedule K-1 (Form 1041), box 13, code B, any credit for backup withholding on income
distributed to the beneficiary.

The Form 1099-R that was received shows amounts in Box 4 for Withholding, which the instructions state are Backup Withholding. That is why I am confused about what to do with the amounts and the correct way. 

Thanks for your help!

[dmertz]

1.  Only backup withholding is permitted to be passed through to estate beneficiaries.  The tax withholding reported in box 4 of the Form 1099-R is almost certainly not backup withholding, so the tax withholding remains as a credit on Form 1041 and any refund will have to be paid to the estate to be subsequently distributed to the estate beneficiaries.  This is why, in general, tax withholding should be declined on any retirement distributions paid to an estate.  (A distribution to the estate would be subject to backup withholding only if the executor failed to provide the payer with the EIN of the estate or if the IRS had previously explicitly made the estate subject to backup withholding.)

2.  The taxable amount of the distribution to be entered is the amount in box 2a of the Form 1099-R.  That will be the same as the amount in box 1 if nothing is shown in box 5.

[cwdjr1964]

Getting back to the AnnVV's original question: 

For the "Distributions" do you put the actual Distribution amount which was "Distributions less the Tax Withheld amount" or is it the "Gross Distribution amount"?  The reason I ask is that on the K-1, the tax withheld is shown as a credit, therefore I wonder if the Distribution amount listed should be the Gross Distribution amount. 

What would be the correct answer?

[dmertz]

The taxable amount gets reported on Form 1041.  That amount is not reduced by any tax withholding, the portion withheld for taxes is simply a part of the taxable distribution that was paid to tax withholding.

[cwdjr1964]

During the interview, TT asks if all of the trust's income was distributed.  Do I answer yes even though tax was withheld as shown in box 4 of the 1099-R that cannot be distributed to the beneficiaries until the trust receives its refund. TT doesn't take into consideration withholding until later in the interview.

If I try to make an adjustment to the amount paid to the beneficiaries or make any adjustments to the amount of taxable income, the overpayment amount (refund) due to the trust decreases below the amount that I believe is correct.

[dmertz]

TurboTax reports this as tier 1 distributions.  If the estate is required to distribute income (determined by state law or the will), tier 1 distributions include amounts required to be distributed even if not distributed like the tax withholding.