Handling of K1 income [from trust income]

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
User avatar
dmcmahon
Posts: 1872
Joined: Fri Mar 21, 2008 10:29 pm

Handling of K1 income [from trust income]

Post by dmcmahon » Tue Mar 08, 2016 10:42 am

I have a question related to K1 income.

Suppose that person A receives income from trust T. The income is paid in arrears after the calendar year. That is to say, in 2016, A received income from T that was computed on the trust's 2015 income. The trust paid 100% of its income to A, so it doesn't owe any tax, but simply files a return for 2015, and issues the K1.

Question: does A report the 2015 K1 from the trust for A's 2015 tax year? Or, since the income is received in 2016, is this to be reported on the 2016 return?

Wagnerjb
Posts: 7203
Joined: Mon Feb 19, 2007 8:44 pm
Location: Houston, Texas

Re: Handling of K1 income [from trust income]

Post by Wagnerjb » Tue Mar 08, 2016 11:22 am

I am an amateur at this, having prepared a few simple trust tax returns for my mother's bypass trust. The trust doesn't typically pay tax because it gets a deduction for income distributed to the beneficiary (and thus the trust has no taxable income). In your example, the trust had income in 2015 but didn't distribute the income to the beneficiary until 2016. In that case, I would think the trust would NOT get the income distribution deduction for 2015 and thus the trust would owe tax on that income for 2015.

Hopefully a tax lawyer will chime in to confirm or correct my hunch.

Best wishes.
Andy

ChesaPeAke27
Posts: 15
Joined: Fri Mar 04, 2016 1:30 pm

Re: Handling of K1 income [from trust income]

Post by ChesaPeAke27 » Tue Mar 08, 2016 11:40 am

'A' should report the K1 income on the 2015 tax return.
ChesaPeAke27

MarkNYC
Posts: 1381
Joined: Mon May 05, 2008 7:58 pm

Re: Handling of K1 income [from trust income]

Post by MarkNYC » Tue Mar 08, 2016 12:57 pm

Wagnerjb wrote:I am an amateur at this, having prepared a few simple trust tax returns for my mother's bypass trust. The trust doesn't typically pay tax because it gets a deduction for income distributed to the beneficiary (and thus the trust has no taxable income). In your example, the trust had income in 2015 but didn't distribute the income to the beneficiary until 2016. In that case, I would think the trust would NOT get the income distribution deduction for 2015 and thus the trust would owe tax on that income for 2015.
Estates and trusts are allowed something called a Sec 663(b) election, whereby they can treat amounts distributed to beneficiaries within the first 65 days of the year as being distributed on the last day of the preceding year, thereby allowing the income distribution deduction in the preceding year.

Post Reply