Trust Taxes - TurboTax Business

[Suzham]

Background:  I have a "complex trust".

It earns interest, dividends, short term capital gain distributions, long term capital gain distributions, short term capital gain from asset sales, and long term capital gain from asset sales. 

Trust rules allow me to distribute interest, dividends, and short term capital gain distributions from the trust and pay the taxes in my 1040.   

Questions:

1.  Can I do the same - distribute from the trust and pay taxes in my 1040 - for long term capital gain distributions, short term capital gain from asset sales, and long term capital gain from asset sales?

OR do I have to pay the taxes for these three types of earnings in the 1041?

2.  If I have to pay the taxes for these three types of earnings in the 1041, can I then distribute the after tax earnings out of the trust?  

3. Last year the trust only earned interest and dividends as reported on the 1099; which I entered into TurboTax .  I also entered into TurboTax the amount I had distributed out of the trust.  TurboTax automatically generated a K1 allocating my distributed interest and dividends.

This year I have more types of income.  If I am allowed to distribute all of those types of income, will the TurboTax generated  K1 allocate each type?  If not, what will I see on the K1?

[M-MTax]

You can distribute what the trust allows you to distribute and cap gains usually stay within the trust and the trust pays any taxes due on those gains. After the assets are sold and the trust gets the cash and pays tax on the cap gains then you can distribute the cash.....because you're distributing cash after the trust paid income tax. No matter what type of income you distribute the K-1s will show the type....dividends, interest, gains, whatever.

[Suzham]

Very thorough and complete answer.  Just what I needed.

Thank you,

[Suzham]

One more question.  As I put information into TurboTax business I noticed something that seems contrary to Trust Law.

I am paying the tax for the long term capital gain distribution in the Trust (as required).  After the trust pays the tax I want to distribute the LTCG distribution income to myself as the beneficiary.  The K1 generated by TurboTax correctly shows interest and dividend distribution with taxes to be paid on my 1040.  But it does not show the LTCG distribution at all.

My understanding of Trust Law says that all distributions (taxable or non taxable) must be reported to me as the beneficiary and to the IRS on the K1.  

How can I get the distribution of funds on which no tax is owed to show up on the K1?