K-1 taxable income Form 1041

[pattyg2]

Every year I must prepare one K-1 and I do it differently every year and spend a lot of time probably misinterpreting all I read.

It is a Complex trust: All income distributed to surviving spouse... $5000 of interest income. She gets all $5000 with nothing kept back to pay professional fee that I charge each year.

Questions:

1) Form 1041. Line 14, do I show an amount for tax preparer fee paid out of corpus and thus reduce the income on K-1? Surviving spouse did not pay the fee.

2) Also paid out of corpus is real estate tax and insurance on surving spouse's home. Does this show on Form 1041 Line 11 even though it also was not paid out of the income of the trust?

Most importantly:

3) Does the K-1 show taxable income of $5000 of interest? Or does it show taxable income of $5000 minus amounts paid from corpus.

Sometimes it is the simplest things that I try to make more difficult than they are.

[John of PA]

very good questions

These are very good questions, I look forward to reading the answer. I am curious, is the activity as you laid out in your question exactly as instructed by the trust instrument. Does the trust document say pay fees, etc. out of corpus?

[pattyg2]

trust doc

yes, that is how the trust document reads.

[Burke]

Certain expenses of the trust are deducted from gross income to determine net income, and if distributions are made to the beneficiary, then the distribution deduction on Page 2 determines the net amount which flows through to the bene's K-1. Actual distributions may be more than the net income of the trust. In which case, her K-1 reflects this by showing reduced items of income prorated amoung the categories, such as interest, dividends, etc, etc.. Eligible deductible expenses would include your fee, filing fees for the accounting, accounting fees for preparing the accounting, legal fees, etc. The real estate taxes would be deductible if the trust owns the property. The insurance would not be. If the trust does not own the property, but is owned by the beneficiary, then any expenses for that property are deemed distributions to the bene, including the insurance.