Reporting K-1 (1041) Trust Income on 1040

[bbrownatl]

Ok, I'm a bit confused here as I'm not a trust expert. I'm doing an individual regular 1040 return where my client gets a K-1 (Form 1041) which shows $55K of rental real estate income. I currently have it flowing to the 1040, perhaps incorrectly. This is a new client who does not have a copy of their prior year return. So, I was able to get the IRS transcript and reviewed the presentation. For 2012, they show in the K-1 income of $69K and then they show offset of ($69K) under Rent/Royalty Income for a net of $0. Do I need to show the inflow and then offset? If so where and how? Thanks in advance for your help.

Brian

[bbrownatl]

What to report & where??

Ok, I'm officially way confused on this one. I understand that who is liable for the tax on the earned income of the trust is the one who receives or retains benefits. So, in this case, the trust had rental income of $55K. However, to my knowledge, there is nothing on the K-1 indicating how much cash was actually distributed. I did look at a register from the Form 1041 prep which shows a distribution of $20K in Jan. 2104. So, it would seem that the $55K needs to flow in and then out of the Form 1040 (both on Sch E??) and that is the only disclosures needed, right? Then, the $20K which was an actual distribution is taxed to the beneficiary/taxpayer, again on Sch E? Any insight appreciated. Much thanks.

[BOB W]

K-1 are usually the net of all transaction in the trust. Where is the off set coming from? The $20,000 is just a basis adjustment and should not be tax separately. More than likely it is a distribution to cover any taxes on the taxable income, in this case the $55,000.


?????????? My quess is the the prior preparer completed the return incorrectly.

[bbrownatl]

Income fully distributed annually

Bob, much thanks for your feedback. I just got confirmation that the trust requires all income to be distributed annually and that is how the trust tax returns show it. Accordingly, the K-1 income (rental income and all) would flow to the individuals 1040. I think I have it. Still any other feedback is much appreciated.

Much thanks,
Brian

[DaveO]

Reported Trust income does not have to equal the money distributed. It can be more or less. I don't know of any offset to trust income that would be separately stated on the 1040.

[Roland Slugg]

You aren't seriously thinking of preparing this person's 2013 return without seeing his actual 2012 return ... are you?

My guess is the the prior preparer completed the return incorrectly.

What good is someone's guess? There are legitimate reasons why the 2012 return could have the amounts reported the way they were. But you certainly can't report $55k of trust income on Schedule E, line 33, then back-out the same amount on Schedule E, page 1, unless there is a good and valid reason for doing so. Brian (bbrownatl) needs to see this person's actual 2012 return, or if that's not possible, he needs to study the IRS transcript he has carefully, paying particular attention to the reason for last year's $69,000 deduction. I'm not even sure if transcripts have enough detail, in a readable format, to permit this.

My advice to bbrownatl is this: Don't guess at what to do. And definitely don't report $55k of income in one place, then a $55k deduction somewhere else unless you KNOW what you're doing.

[bbrownatl]

Prior Return / Clarification Obtained

Roland, I appreciate your feedback and concern. I absolutely agree that a fully understanding is necessary before proceeding forward. I did obtain the full understanding yesterday through various discussions and review of documents. I agree as well that an IRS transcript of a return doesn't fully give the picture. I would certainly like the full one as filed. However, in this case, the client did not have a copy and the prior accountant had a heart attack and his practice dissolved. Accordingly, I had to go the transcript route.

[Roberts]

Bob, much thanks for your feedback. I just got confirmation that the trust requires all income to be distributed annually and that is how the trust tax returns show it. Accordingly, the K-1 income (rental income and all) would flow to the individuals 1040. I think I have it. Still any other feedback is much appreciated.

Much thanks,
Brian

Income being fully distributed would be a deduction on the 1041 meaning the trust itself isn't taxed.
That isn't a deduction on the individuals 1040.

[Ben]

1041 Trust

The k-1 reports rental to Sch E of the 1040. Interert go to Sch B. The k-1 tell how to report on the 1040. The 1041 should have a (300) credit.

[Burke]

Bob, much thanks for your feedback. I just got confirmation that the trust requires all income to be distributed annually and that is how the trust tax returns show it. Accordingly, the K-1 income (rental income and all) would flow to the individuals 1040. I think I have it. Still any other feedback is much appreciated. Much thanks,Brian

I am late to this post as I have been out of the country since 10/4. If the trust requires all income to be distributed annually, then the $55K shown on the K-1 (which is a net figure after expenses) should be reported on page 2 of Sche E under Income from Trusts or Estates. This flows to page 1 of the 1040. A software worksheet for K-1's should do this automatically. (Is this rental property? If there is a discrepancy between income and distributions, it may have to do with how depreciation was handled.) There should be no offset or zeroing out of this income anywhere. Do you know why it was done last year? PS: You can get a complete copy of the tax return from the IRS, which looks like a regular tax return printed out by any software, by completing the proper form and paying a fee. Getting a copy of the client's 1040 rather than a transcript may not help you. Getting a copy of the Trust 1041 might. It would have the rental schedule form with it. If your client is a beneficiary of this trust, he should have a copy upon request. The fiduciary (if different) would have had to sign the 1041 and should have a copy. (PS: the $20K distribution you see in the books for Jan 2014, may have been for the previous calendar year. It is allowable to pay these as late as 65 days after the year end, so that may have been an additional distribution to one received earlier in the year to equal $55K.) As always, I recommend getting a copy of the trust document whenever there is any confusion regarding how $$ is distributed or when doing the actual 1041 return.)

[bbrownatl]

Thanks

Burke, much thanks for your feedback. I did proceed and actually treated it as you mentioned. Thanks again.