Do tax Payments Count as Trust Distribution

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AS7911
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Do tax Payments Count as Trust Distribution

Post by AS7911 »

I have a Complex trust, where income is (optionally) distributed to avoid the high Trust Tax brackets. Suppose $10k is distributed, but $9k goes directly into my checking account, and $1k goes directly from Trust to the IRS for Tax payments. On my K-1, does it show $9k, or $10k? Would it be different if $10k went into my checking account, then I (not the trust) wrote the check for the Trust's $1k tax liability?
MarkNYC
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Re: Do tax Payments Count as Trust Distribution

Post by MarkNYC »

If a trust sends a tax payment to the IRS, it will be treated as a trust estimated tax payment to be applied against any trust tax liability as shown on the trust tax return. Instead, the trust can elect to have the estimated tax payment allocated to the trust beneficiary(s) by properly completing and timely filing Form 1041-T. A trust estimated tax payment that is allocated to the beneficiary should be treated as a distribution to the beneficiary, and the income and estimated tax payment should be reported on the beneficiary's K-1.
bsteiner
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Re: Do tax Payments Count as Trust Distribution

Post by bsteiner »

MarkNYC wrote: Sat Feb 10, 2024 2:46 pm If a trust sends a tax payment to the IRS, it will be treated as a trust estimated tax payment to be applied against any trust tax liability as shown on the trust tax return. Instead, the trust can elect to have the estimated tax payment allocated to the trust beneficiary(s) by properly completing and timely filing Form 1041-T. A trust estimated tax payment that is allocated to the beneficiary should be treated as a distribution to the beneficiary, and the income and estimated tax payment should be reported on the beneficiary's K-1.
Correct. Internal Revenue Code Section 643(g): https://www.law.cornell.edu/uscode/text/26/643.

Note that the trustees must so elect by the 65th day of the following year, which would be March 6 (March 5 in the case of a leap year).
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AS7911
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Re: Do tax Payments Count as Trust Distribution

Post by AS7911 »

so if the Trust directly makes the tax payment, does that payment reduce in any way the Trust income that goes on its 1041 ?
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Lee_WSP
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Re: Do tax Payments Count as Trust Distribution

Post by Lee_WSP »

AS7911 wrote: Sat Feb 10, 2024 5:47 pm so if the Trust directly makes the tax payment, does that payment reduce in any way the Trust income that goes on its 1041 ?
If by reduce, you mean shift to you, yes.
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AS7911
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Re: Do tax Payments Count as Trust Distribution

Post by AS7911 »

Lee_WSP wrote: Sat Feb 10, 2024 6:39 pm
AS7911 wrote: Sat Feb 10, 2024 5:47 pm so if the Trust directly makes the tax payment, does that payment reduce in any way the Trust income that goes on its 1041 ?
If by reduce, you mean shift to you, yes.
I guess I'm not clear. If the Trust has $50k in gross income, and pays $10k in taxes... does the income get reduced to $40k?
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Lee_WSP
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Re: Do tax Payments Count as Trust Distribution

Post by Lee_WSP »

AS7911 wrote: Sat Feb 10, 2024 6:58 pm
Lee_WSP wrote: Sat Feb 10, 2024 6:39 pm
AS7911 wrote: Sat Feb 10, 2024 5:47 pm so if the Trust directly makes the tax payment, does that payment reduce in any way the Trust income that goes on its 1041 ?
If by reduce, you mean shift to you, yes.
I guess I'm not clear. If the Trust has $50k in gross income, and pays $10k in taxes... does the income get reduced to $40k?
Pays your taxes? Yes

Pays the trust taxes, no.
humblecoder
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Re: Do tax Payments Count as Trust Distribution

Post by humblecoder »

AS7911 wrote: Sat Feb 10, 2024 1:01 pm I have a Complex trust, where income is (optionally) distributed to avoid the high Trust Tax brackets. Suppose $10k is distributed, but $9k goes directly into my checking account, and $1k goes directly from Trust to the IRS for Tax payments. On my K-1, does it show $9k, or $10k? Would it be different if $10k went into my checking account, then I (not the trust) wrote the check for the Trust's $1k tax liability?
I am not a lawyer, accountant, or tax professional.

I assume that estimated tax payments are for the TRUST'S estimated taxes. You aren't talking about the trust making estimate tax payments on behalf of the beneficiary.

The IRS instructions for Form 1041 seem pretty clear on this matter:

A trust or decedent's estate figures its gross income in much the same manner as an individual. Most deductions and credits allowed to individuals are also allowed to estates and trusts. However, there is one major distinction. A trust or decedent's estate is allowed an income distribution deduction for distributions to beneficiaries.


Note the word beneficiaries, which I bolded. Again, not a lawyer, but a trust making an estimated tax payment to the IRS for the trust's tax liability wouldn't seem to qualify as a distribution to a beneficiary. It is a distribution to the IRS for purposes of paying the trust's taxes. I wouldn't think that the IRS would be considered a beneficiary of a trust (although sometimes what makes sense logically doesn't always align with the law :-))

Now if the trust were making a distribution to the IRS to make an estimated tax payment for the beneficiary's taxes, then I could see this being deductible. But I don't think that's what you are asking.

Source: https://www.irs.gov/pub/irs-pdf/i1041.pdf
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White Coat Investor
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Re: Do tax Payments Count as Trust Distribution

Post by White Coat Investor »

AS7911 wrote: Sat Feb 10, 2024 1:01 pm I have a Complex trust, where income is (optionally) distributed to avoid the high Trust Tax brackets. Suppose $10k is distributed, but $9k goes directly into my checking account, and $1k goes directly from Trust to the IRS for Tax payments. On my K-1, does it show $9k, or $10k? Would it be different if $10k went into my checking account, then I (not the trust) wrote the check for the Trust's $1k tax liability?
Not sure there's enough detail to answer the question. I'm not sure "complex" is a specific type of trust.

For example, my trust is an intentionally defective grantor trust, a type of irrevocable trust that passes its tax bills through to me personally until I die. So there are no trust taxes. It is permitted to pay my taxes, but I'm actually better off estate-tax-wise receiving payments on its promissory note and then paying the taxes myself in order to reduce the estate:trust asset ratio.
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Cuzz35
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Re: Do tax Payments Count as Trust Distribution

Post by Cuzz35 »

Generally speaking a Complex trust is a specific type of trust that pays tax on its undistributed income.

A trust making a payment on its own tax liability is not a deduction for the trust. If it pays the tax of a beneficiary or elects to have payments it made treated as made for a beneficiary as previously described, than that payment is treated as a distribution to the beneficiary.

Whether the distribution is taxable to the beneficiary or tax free depends on the trusts distributable net income. To the extent the trust has distributable net income equal to or more than the distribution then the distribution is likely fully taxable. The category or income to the beneficiary is reported on a k1.

If distributable net income is less than the distributions to the beneficiary then a portion is likely tax free. Again, any amount of income is reported in a K1.

The trust receives a deduction for any income that is distributed. For this purpose, capital gain is generally does not get the same treatment and stays with the trust and is taxed there. Some trusts can elect to include capital gain income in it's distributable net income which allows it to pass out to the beneficiary.

There's not enough info to know whether your k1 will have 9 or 10k of income based on the information you provided. I think of the tax payment was made on your behalf then you likely have $10k of income to recognize but the trust could have less than 10k of DNI. If you just need to know form planning purposes then it probably makes sense to assume the higher number.
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AS7911
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Re: Do tax Payments Count as Trust Distribution

Post by AS7911 »

I personally am in a lower marginal tax bracket than the Trust. I was trying to determine if it made a difference if the Trust's tax liability was paid directly by the Trust, or the amount owed to the IRS was distributed to me, then I pay it on behalf of the Trust. Sounds like it is best to distribute the income to me first.
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