Form 1041 -Small Capital Loss originating from Parent/Grantor Final Trust in 2020 keeps being uploaded to Beneficiaries' 1041 Sch. D every subsequent year.

[One4uTwo4me]

I am a beneficiary of a Grantor/Parent trust that was finalized in 2020. The K-1 that I received in 2020 from my parents final trust had $427 in box 11C, which was the code for Short-Term Capital Loss Carryforward at that time. On my 1041 that I filed in 2020 using TurboTax, the $427 loss automatically flowed to Schedule D, Part I, Lines 5 & 7 and then to Schedule D, Part III Lines 17 & 19 in Column (2) and Column (3) and then to Schedule D, Part IV,  Line 20. From there the $427 loss flowed to my 1041, Line 4 where the loss reduced my Total Income by $427. Everything seemed accurate at this point. 

However, for subsequent years 2021 and 2022, this same $427 amount is being automatically entered by TT into the same Schedule D lines as listed above on my 1041 returns. This does not feel right because I am getting a $427 Capital loss benefit every year I file my taxes. In other words, I've now claimed a total of $1,281 in Capital Losses over the course of these 3 years.

Is this an error in the TurboTax Software?  Or did I not make a proper entry somewhere on my 2020-1041 return?  Should I just override TT by removing the $427 from Schedule D? 

[tagteam]

Clearly something is awry if you entered an 11C loss from a final K-1 your trust received in 2020, the loss was deducted from the other income your trust received, your trust pays any tax due, and the same figure was carried forward to subsequent tax years on your 1041.

Have you looked at your 2021 and 2022 Carryovers/Carryforwards Worksheets? You can probably better troubleshoot this by using Forms Mode for those two years and checking the worksheets and the K-1 your trust received.

Whatever you do, don't do any overrides until this issue is resolved. At worst, you might have to send your tax file to an agent for further review.

[One4uTwo4me]

Thank you for your reply. Yes, both the 2021 and 2022 Capital Loss CO Worksheets have entries on Lines 1, 2, 3 and 6 with Line 9 having the $427 as the final calculation for the carryforward to the following year. 

[tagteam · Accepted solution]

I was referring to the worksheet in the screenshot below, but the only way I can get a carryover (on the CL CO worksheet) as you described is if I generate a 1041 with no income. 

[One4uTwo4me]

Interesting! Perhaps you've answered my question. My 1041 has a very large NOL (passed on from Grantor/Parent Trust in 2020) that wipes out the Total Income earned by my trust. There has been a NOL balance carried forward to years 2021 and 2022 and will continue to be carried forward until approximately 2027 when it is fully used up. Maybe the $427 didn't actually offset the Trust Income back in 2020 because the NOL offset the income first. I'll check into that. Thank you. 

[Mike9241]

maybe i don't understand your situation correctly but with a grantor trust there is no capital loss carryforward.  Everything pre-death flows out to the grantor including capital losses.  post-death any capital losses remain in the trust to offset capital gains.  if there are net capital gains (gains less any loss carryforward) in a year the trustee/administrator has the right (or obligation if specified by the trust) to treat the net capital gains as being distributed to the beneficiaries. Then any capital loss carryforward is utilized. This also occurs if the trust retains the net capital gains rather than distributing them. if the CLCO is not utilized by the final year of the trust, upon termination the CLCO is distributed to the beneficiaries.     

[tagteam]

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@Mike9241 wrote:

maybe i don't understand your situation correctly but with a grantor trust....

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Maybe I don't either, because according to the facts set forth in the original question, this trust is not being presented as a grantor trust. 

If this were actually a grantor trust, there would be only a (basically blank) 1041 and a GIS (grantor information statement) with no Schedule D or carryover worksheet. The CL would also not appear on the 1041.

[One4uTwo4me]

Found the Carryover Worksheet (CO/CF Worksheet).  Yes, the $427 appears on Line 5. I also have large amounts on Lines 1 and 2 for the NOL that was was passed to me from my parents final trust in 2020. The $427 appears on this worksheet for 2020, 2021 and now 2022. NOL amounts appear for all three years as well but the number is decreasing because the NOL balance is being used to offset ALL trust income. 

[One4uTwo4me]

Maybe I am not using the term "Grantor" correctly. Are you considering my trust 1041 as a "Grantor Trust"?  Because I use this term to refer to my parent's trust that was finalized in 2020 and my trust as a "Beneficiary Trust".  Is this incorrect usage?

The K-1 that my trust, the beneficiary, received from my parent's 1041 in 2020 had $427 in box 11C. In 2020, Code 11C on a K-1 is for Short-Term Capital Loss Carryforwards. So I don't understand how "with a grantor trust there is no capital loss carryforward". 

Keep in mind I did not prepare my parent's final trust returns in 2020. They were prepared by a CPA that had been doing their taxes for many years. So I do not know what S-T capital loss transaction created the $427 or what other offsetting capital gains there might have been. 

[One4uTwo4me]

Correct. The 2022-1041 that I am preparing is my trust as the beneficiary to my parent's trust. My trust is like a sub-trust to the original Grantor Trust. 

[tagteam]

If your trust (the one for which you are preparing a return) was a grantor trust, you would be considered the owner of the assets held by the trust.

As a result, the trust would be disregarded for federal income tax purposes and all of the items of income, expense, gain, loss, etc. would pass directly to you and you would have a grantor information statement from which you would report those items on your personal income tax return (1040).

We have no way of knowing how your trust was set up, so it's a guessing game at this point (unless you provide further details). Regardless, from what you described, you are treating the trust as a nongrantor trust. 

[One4uTwo4me]

My "exempt" trust was created in 2020, the year of death of my surviving parent. It is exempt for purposes of generation skipping taxes. It is also considered a "complex" trust. The assets in my trust were "inherited in trust" because when I pass away, the assets must go to the beneficiaries designated in my parent's original trust. So I technically don't own the assets 100% because I do not have the ability to sell the assets (without approval) nor designate my own beneficiaries. My two sisters and I inherited equal shares of the assets from my parent's trust. 

In 2020, I was privy to the 1041's that my sister's CPA prepared because their CPA's would contact me for information about my parent's finances. Our 1041's were filed exactly the same in 2020 and with the same amounts. I was hoping to get an answer here in the TT Community because much of my issues are because I can't get TT to do what I need done. For example, the NOL that was passed to my sister's and me originated in 2016 due to a large loss on the sale of real estate. My first 1041 was filed in 2020 using TT. When I entered the K-1 data from my parents final return, TT automatically assumed that the NOL originated in 2020 and incorrectly applied the 80% limitation rule. There was no way to tell TT that the NOL should be grandfathered in under the old rule.

[tagteam]

Now I understand, so thank you for providing the details. 

Unfortunately, TurboTax Business makes certain presumptions with respect to each individual module (1065, 1120, 1120-S, 1041) and often users need to resort to Forms Mode to make corrections appropriate to their particular tax situation. 

Fortunately, on the other hand, it appears as if your original issue is resolved. 

[One4uTwo4me]

Thank you for pointing me in the right direction. With your help I was able to determine that the $427 capital loss carryover is indeed legit and it will be used to offset trust income when the NOL Carryforward is used up.