Schedule K-1

[taxdean]

Again, I need more clarity - sorry.

Are you saying that the amount that must be used in the first year (in order to be able to carry anything forward) is determined by the lesser of $3,000 and whatever income they happen to have in that year, even if that income is in a very low tax bracket (and they would prefer to use the first bite to offset income in a later year when they expect to be in a higher bracket)?

Regarding the state return, are you referring to something that the beneficiary may have to file, but not anything that the estate needs to supply to them?  I am assuming that the beneficiary would already be filing a state tax return (unless in a no income tax state like Florida).

Thanks.

[Anonymous_]

Florida has neither an estate tax nor an income tax (on estates, trusts, or individuals) so there is nothing you (or the beneficiaries) need to file in Florida.

In other states, the law varies and, as I mentioned, California requires a return to be filed by the estate or trust is a resident is receiving a distribution.

See https://www.ftb.ca.gov/file/personal/filing-situations/estates-and-trusts/index.html

[Anonymous_]

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@taxdean wrote:

Are you saying that the amount that must be used in the first year (in order to be able to carry anything forward) is determined by the lesser of $3,000 and whatever income they happen to have in that year, even if that income is in a very low tax bracket (and they would prefer to use the first bite to offset income in a later year when they expect to be in a higher bracket)?

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I am not following what you wrote at all. The loss that is passed through is reported on their individual returns (from the K-1s) in its entirety. From that point, the loss can be used to offset any capital gains they might have and then, if the gains are brought down to zero, they can use up to $3,000 (of the excess loss) to offset any other income.

I apologize if I did not address your question specifically.

[taxdean]

I am still confused.  Earlier, we, or someone else on this long thread, talked about the state where the deceased resident lived and I thought it concluded with, if that is Florida, there is no need to supply K-1 forms to any state, i.e., that the federal K-1 would do for any beneficiary in any other state.  So, when you talk about "other states" are you really referring to where the deceased lived (or, perhaps, where the revocable trust was created)?  Or are you, indeed, referring solely to where the trustee(s) and/or beneficiaries live?   It seems like you intend the latter, which would seem to mean that the accountant in question would need to learn the rules of every state where a beneficiary and/or trustee resides in order to know what forms he needs to send on behalf of the trust.  If so, all I can say is "what a mess!"  Is it at least true that TurboTax would know all this and produce all the necessary forms for all the necessary states, after the accountant provides the residency of all beneficiaries and trustees?  I could imagine a trust that had beneficiaries in all 50 states! 

[taxdean]

Realizing that this was California as an example, but, indeed, most of the beneficiaries of this Florida trust do reside in California, where what you sent says:

And the trust has:

• Gross income is over $10,000
• Net income is over $100
• If so, I am not sure what net income means but if it is what we think is actually a loss, then perhaps there are no forms that need to be filed with California by the estate.

[taxdean]

A few more nits popped up over the weekend:

You say April 18th but someone else states that you were correct in telling me the 15th.  I would assume they are simply generalizing, except that the letter we got from the IRS assigning an EIN to the trust last May or so said the Form 1041 (which I assume includes the K-1s) was due by April 15th, 2022.   Please confirm that the IRS letter is wrong, and that the 18th is correct because we may come down to the last day, unfortunately!

Regarding your agreement of what I suggested, that any loss would be shared according to the percentage of inheritance, I later clarified that the first in line beneficiaries got a fixed dollar amount, whereas the remaining 2 beneficiaries get half of what is left, although i think I also noted that the percentage calculation seems easy enough to do regardless.  However, does it matter if the former got their distributions in 2021 but the latter two did not get some of theirs until 2022, in order to make sure there was enough funds undistributed to pay bills, etc?   Can we still use what we expect will be the final percentage breakdown or is there something holy about declaring the capital loss all in the first year that says the breakdown can only use amounts distributed in that first year, which could change the percentages considerably.

Based on the loss due to the sale of a home and some estate-settlement-related expenses, which are the only facts here, can someone advise me as to which rows on the Schedule K-1 will be filled in, so that I can fill in placeholder numbers now in the K-1 section of TurboTax for my own personal 2021 income tax return - so I will be ready to go on the 18th, if it comes down to being that late before the K-1s are generated?

Thanks much!

[Anonymous_]

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@taxdean wrote:

I could imagine a trust that had beneficiaries in all 50 states! 

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State laws vary but what you stated is indeed possible and TurboTax will not direct you to file a return in a certain state (the trustee, or whoever is preparing the return) needs to know whether or not a return is required.

Typically, it is sufficient to issue a federal K-1 (1041) to the beneficiaries as any income will flow through to their federal tax returns and then to their state tax returns (if any).

[Anonymous_]

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@taxdean wrote:

• If so, I am not sure what net income means but if it is what we think is actually a loss, then perhaps there are no forms that need to be filed with California by the estate.

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Yes, if there is a loss, filing a CA return is probably just a waste of time and effort.

[Anonymous_ · Accepted solution]

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@taxdean wrote:

Please confirm that the IRS letter is wrong, and that the 18th is correct....

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The 18th is correct because of holidays.

See https://www.irs.gov/newsroom/2022-tax-filing-season-begins-jan-24-irs-outlines-refund-timing-and-wha...

Also, the distribution dates do not factor into the equation here because (a) it is the tax year of the trust that matters (and that tax year is 2021) and (b) you are distributing corpus, not income.

[Anonymous_]

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@taxdean wrote:

.....can someone advise me as to which rows on the Schedule K-1 will be filled in....

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From what you described, the only line that will be populated on the K-1s is Line 11 as there is neither income nor gain (only a net capital loss and final year deductions).

Therefore, Line11 (with a D code) should be populated with a long-term loss. Also, Line 11, with either an A or B code or both, should be populated depending upon the type of deductions the trust incurred.

[taxdean]

Perhaps it doesn't matter, but Is it considered a LONG-term loss even though the previously revocable living trust only held it 3 months past the date of death until selling it (and quickly distributing the proceeds)?

[Anonymous_ · Accepted solution]

Yes, the holding period is automatically long-term when property is acquired from a decedent (which is the case here).

[taxdean]

Is the loss shared proportionally according to how much each got as a distribution? It is shared based on their percentage of inheritance.

The question is whether it can be an implied percentage or not?  The trust says 3 folks first split in 1/3rds each up to 150,000, so a maximum of 50,000 each; and any remainder, say 200,000 if the asset sells for 350,000, is split equally between 2 other folks, so 100,000 each.   So, if the property sells for less than its FMV at death, does the tax loss get allocated (I assume by the K-1 forms) 50/50 between the other 2 people only?  Or is it split by all five according to $50/$50/$50/$100/$100, e.g., $100/$350 for the last two people and $50/$350 for the first three?    The trust document does not specify percentages, only words similar to what I just mentioned above.  Thanks.

[Anonymous_]

If it reads " up to a maximum", then their shares abate accordingly.

[taxdean]

So, these fixed beneficiaries should still be sent K-1s but they will have all zeroes on therm in terms of any tax impacts.  Is that correct?  If so, those beneficiaries can probably file their personal tax returns now, knowing that the K-1s they get will have no impact, right?

To be clear, you are saying that such wording means that they do not share in any taxable gain or loss, right?

A yes answer makes me want to pose a hypothetical: Suppose that the sales proceeds had not been enough to reach this maximum but there were income, say due to bank interest after the sales proceeds were deposited in a trust bank account but before anything was distributed to beneficiaries, and, with that interest, there was more than enough.  Does that mean they would then have some tax exposure in that case, i.e., on the part of their 50k that was due to interest?  Or would the trust be responsible for paying all the taxes on that bank interest?

Thanks!