Trust/Tax question
Trust/Tax question
If a trust suffers an investment loss, will that show up as a loss on the K1 and can it be included as a loss on the beneficiary's personal return?
Re: Trust/Tax question
Depends on whether it is a capital loss, and whether capital gains and losses pass through to the Beneficiaries according to the Trust document. In most trusts, capital gains and losses are retained in the trust but not always
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Re: Trust/Tax question
Trusts can only distribute losses to beneficiaries in their final year. Prior to that the trust can carry it forward and apply it to future trust income.
Re: Trust/Tax question
Not always true. The trust document spells out the rules. I’ve dealt with lots of trusts that pass cap gains and losses through every yeartoddthebod wrote: ↑Thu Oct 06, 2022 5:40 pmTrusts can only distribute losses to beneficiaries in their final year. Prior to that the trust can carry it forward and apply it to future trust income.
Re: Trust/Tax question
How?ghost1 wrote: ↑Thu Oct 06, 2022 5:53 pmNot always true. The trust document spells out the rules. I’ve dealt with lots of trusts that pass cap gains and losses through every yeartoddthebod wrote: ↑Thu Oct 06, 2022 5:40 pmTrusts can only distribute losses to beneficiaries in their final year. Prior to that the trust can carry it forward and apply it to future trust income.
Re: Trust/Tax question
On the K1. Some trusts call for corpus distributions each year and gains/losses to pass through along with dividends and interest.
Re: Trust/Tax question
Per the trust document. Authority of the trust
Re: Trust/Tax question
In other words, the trust instrument can negate the general tax rule?
Gill
Cost basis is redundant. One has a basis in an investment |
One advises and gives advice |
One should follow the principle of investing one's principal
Re: Trust/Tax question
I believe that this is the relevant regulation:
https://www.law.cornell.edu/cfr/text/26/1.643(a)-3
The section on capital losses states:
https://www.law.cornell.edu/cfr/text/26/1.643(a)-3
The section on capital losses states:
One would need to read the entire regulation to get a fuller understanding of the rule, but note that the phrase “the terms of the governing instrument and applicable local law” appears several times.(d) Capital losses. Losses from the sale or exchange of capital assets shall first be netted at the trust level against any gains from the sale or exchange of capital assets, except for a capital gain that is utilized under paragraph (b)(3) of this section in determining the amount that is distributed or required to be distributed to a particular beneficiary. See § 1.642(h)-1 with respect to capital loss carryovers in the year of final termination of an estate or trust.
Re: Trust/Tax question
I bolded the important part.Nutmeg wrote: ↑Fri Oct 07, 2022 9:57 am I believe that this is the relevant regulation:
https://www.law.cornell.edu/cfr/text/26/1.643(a)-3
The section on capital losses states:One would need to read the entire regulation to get a fuller understanding of the rule, but note that the phrase “the terms of the governing instrument and applicable local law” appears several times.(d) Capital losses. Losses from the sale or exchange of capital assets shall first be netted at the trust level against any gains from the sale or exchange of capital assets, except for a capital gain that is utilized under paragraph (b)(3) of this section in determining the amount that is distributed or required to be distributed to a particular beneficiary. See § 1.642(h)-1 with respect to capital loss carryovers in the year of final termination of an estate or trust.
1.642(h)1 deals with carryover loss in the final year of the trust. Not intervening years.
https://www.law.cornell.edu/cfr/text/26/1.642(h)-1
Re: Trust/Tax question
You are correct that the part you bolded refers to the final year. The part that deals with intervening years is (with boldface that I added for emphasis):Lee_WSP wrote: ↑Fri Oct 07, 2022 10:14 amI bolded the important part.Nutmeg wrote: ↑Fri Oct 07, 2022 9:57 am I believe that this is the relevant regulation:
https://www.law.cornell.edu/cfr/text/26/1.643(a)-3
The section on capital losses states:One would need to read the entire regulation to get a fuller understanding of the rule, but note that the phrase “the terms of the governing instrument and applicable local law” appears several times.(d) Capital losses. Losses from the sale or exchange of capital assets shall first be netted at the trust level against any gains from the sale or exchange of capital assets, except for a capital gain that is utilized under paragraph (b)(3) of this section in determining the amount that is distributed or required to be distributed to a particular beneficiary. See § 1.642(h)-1 with respect to capital loss carryovers in the year of final termination of an estate or trust.
1.642(h)1 deals with carryover loss in the final year of the trust. Not intervening years.
https://www.law.cornell.edu/cfr/text/26/1.642(h)-1
[/quote]d) Capital losses. Losses from the sale or exchange of capital assets shall first be netted at the trust level against any gains from the sale or exchange of capital assets, except for a capital gain that is utilized under paragraph (b)(3) of this section in determining the amount that is distributed or required to be distributed to a particular beneficiary. See § 1.642(h)-1 with respect to capital loss carryovers in the year of final termination of an estate or trust.
Paragraph (b)(3) says:
But someone who is interested in this topic should read the whole regulation for a more complete understanding.(3) Allocated to corpus but actually distributed to the beneficiary or utilized by the fiduciary in determining the amount that is distributed or required to be distributed to a beneficiary.
Re: Trust/Tax question
It doesn’t say what you think it says. All losses are able to offset gains and some income. They can’t be passed through though.Nutmeg wrote: ↑Fri Oct 07, 2022 10:58 am
You are correct that the part you bolded refers to the final year. The part that deals with intervening years is (with boldface that I added for emphasis):
Paragraph (b)(3) says:d) Capital losses. Losses from the sale or exchange of capital assets shall first be netted at the trust level against any gains from the sale or exchange of capital assets, except for a capital gain that is utilized under paragraph (b)(3) of this section in determining the amount that is distributed or required to be distributed to a particular beneficiary. See § 1.642(h)-1 with respect to capital loss carryovers in the year of final termination of an estate or trust.
But someone who is interested in this topic should read the whole regulation for a more complete understanding.(3) Allocated to corpus but actually distributed to the beneficiary or utilized by the fiduciary in determining the amount that is distributed or required to be distributed to a beneficiary.
Re: Trust/Tax question
I have done further research and now agree with your point. Thank you for setting me straight!Lee_WSP wrote: ↑Fri Oct 07, 2022 11:04 amIt doesn’t say what you think it says. All losses are able to offset gains and some income. They can’t be passed through though.Nutmeg wrote: ↑Fri Oct 07, 2022 10:58 am
You are correct that the part you bolded refers to the final year. The part that deals with intervening years is (with boldface that I added for emphasis):
Paragraph (b)(3) says:d) Capital losses. Losses from the sale or exchange of capital assets shall first be netted at the trust level against any gains from the sale or exchange of capital assets, except for a capital gain that is utilized under paragraph (b)(3) of this section in determining the amount that is distributed or required to be distributed to a particular beneficiary. See § 1.642(h)-1 with respect to capital loss carryovers in the year of final termination of an estate or trust.
But someone who is interested in this topic should read the whole regulation for a more complete understanding.(3) Allocated to corpus but actually distributed to the beneficiary or utilized by the fiduciary in determining the amount that is distributed or required to be distributed to a beneficiary.
It seems to me that a beneficiary would rather have the trust take the capital losses than take any losses herself, because trusts have compressed tax brackets, are taxed at the highest rates (as if single), and are subject to AMT just as individuals are.
Re: Trust/Tax question
Re: Trust/Tax question
Maybe I’m wrong, but I did a tax return just last week that had a K1 from two family trusts that had capital losses on it. Last year had capital gains. I see several like that every year. Not final returns. I am not a trust expert though so you may be right and these CPAs are just doing them wrong. Don’t know.
Re: Trust/Tax question
Just like a person, the trust is able to carry over any losses up until the final year at which point see below.ghost1 wrote: ↑Fri Oct 07, 2022 4:14 pmMaybe I’m wrong, but I did a tax return just last week that had a K1 from two family trusts that had capital losses on it. Last year had capital gains. I see several like that every year. Not final returns. I am not a trust expert though so you may be right and these CPAs are just doing them wrong. Don’t know.
Last edited by Lee_WSP on Sat Oct 08, 2022 11:17 am, edited 1 time in total.
Re: Trust/Tax question
Not very many accountants are familiar with fiduciary income tax returns. We've picked up several clients whose accountants never filed income tax returns for trusts.ghost1 wrote: ↑Fri Oct 07, 2022 4:14 pmMaybe I’m wrong, but I did a tax return just last week that had a K1 from two family trusts that had capital losses on it. Last year had capital gains. I see several like that every year. Not final returns. I am not a trust expert though so you may be right and these CPAs are just doing them wrong. Don’t know.
Re: Trust/Tax question
The character and amount of trust income that can be passed through and taxed to a beneficiary is determined by, and limited to, Distributable Net Income (DNI). Per IRC Section 643(a)(3), capital losses are excluded from DNI except to the extent they are used to offset capital gains. Since net capital losses are not included in DNI, the losses cannot be passed through to the beneficiary, except in the final year where the rules are different.ghost1 wrote: ↑Fri Oct 07, 2022 4:14 pmMaybe I’m wrong, but I did a tax return just last week that had a K1 from two family trusts that had capital losses on it. Last year had capital gains. I see several like that every year. Not final returns. I am not a trust expert though so you may be right and these CPAs are just doing them wrong. Don’t know.
Language in a trust document does not override the law. But since the IRS rarely audits trust income tax returns, it's not uncommon for trust income tax returns to be prepared incorrectly with impunity.
Re: Trust/Tax question
That's not correct. Capital losses in a trust are not lost after the final year of the trust. Instead, any unused capital losses in the final year are passed through to the trust beneficiary along with the final-year distribution of trust principal.Lee_WSP wrote: ↑Fri Oct 07, 2022 4:34 pmJust like a person, the trust is able to carry over any losses up until the final year at which point they’re lost.ghost1 wrote: ↑Fri Oct 07, 2022 4:14 pmMaybe I’m wrong, but I did a tax return just last week that had a K1 from two family trusts that had capital losses on it. Last year had capital gains. I see several like that every year. Not final returns. I am not a trust expert though so you may be right and these CPAs are just doing them wrong. Don’t know.
Re: Trust/Tax question
Thanks for all of the replies.
Re: Trust/Tax question
Thanks for weighing in. I wasn’t able to quickly find authority definitively saying one way or the other.MarkNYC wrote: ↑Fri Oct 07, 2022 6:21 pmThat's not correct. Capital losses in a trust are not lost after the final year of the trust. Instead, any unused capital losses in the final year are passed through to the trust beneficiary along with the final-year distribution of trust principal.Lee_WSP wrote: ↑Fri Oct 07, 2022 4:34 pmJust like a person, the trust is able to carry over any losses up until the final year at which point they’re lost.ghost1 wrote: ↑Fri Oct 07, 2022 4:14 pmMaybe I’m wrong, but I did a tax return just last week that had a K1 from two family trusts that had capital losses on it. Last year had capital gains. I see several like that every year. Not final returns. I am not a trust expert though so you may be right and these CPAs are just doing them wrong. Don’t know.
Re: Trust/Tax question
Excess capital losses pass through in the final year of an estate or trust under Section 642(h)(1): https://www.law.cornell.edu/uscode/text/26/642.Lee_WSP wrote: ↑Fri Oct 07, 2022 8:41 pmThanks for weighing in. I wasn’t able to quickly find authority definitively saying one way or the other.MarkNYC wrote: ↑Fri Oct 07, 2022 6:21 pmThat's not correct. Capital losses in a trust are not lost after the final year of the trust. Instead, any unused capital losses in the final year are passed through to the trust beneficiary along with the final-year distribution of trust principal.Lee_WSP wrote: ↑Fri Oct 07, 2022 4:34 pmJust like a person, the trust is able to carry over any losses up until the final year at which point they’re lost.ghost1 wrote: ↑Fri Oct 07, 2022 4:14 pmMaybe I’m wrong, but I did a tax return just last week that had a K1 from two family trusts that had capital losses on it. Last year had capital gains. I see several like that every year. Not final returns. I am not a trust expert though so you may be right and these CPAs are just doing them wrong. Don’t know.
Re: Trust/Tax question
Thank you to all the experts that are weighing in here.
A question from a lay person. If we have a grantor trust (irrevocable), then the income from the trust is taxed to the grantor. But you are saying that if the trust has a loss, then the loss can not be passed to the grantor to offset grantor's other gains?
Not sure I am clear in my question, but if it is unclear please let me know.
A question from a lay person. If we have a grantor trust (irrevocable), then the income from the trust is taxed to the grantor. But you are saying that if the trust has a loss, then the loss can not be passed to the grantor to offset grantor's other gains?
Not sure I am clear in my question, but if it is unclear please let me know.
Re: Trust/Tax question
Grantor trusts are taxed to the grantor, they do not file a 1041, they are not treated as separate taxpaying entities, they are not affected by the special trust tax rules until the grantor status is terminated.Theseus wrote: ↑Sat Oct 08, 2022 11:38 am Thank you to all the experts that are weighing in here.
A question from a lay person. If we have a grantor trust (irrevocable), then the income from the trust is taxed to the grantor. But you are saying that if the trust has a loss, then the loss can not be passed to the grantor to offset grantor's other gains?
Not sure I am clear in my question, but if it is unclear please let me know.
Re: Trust/Tax question
Based on some recommendation we got the EIN. And the CPA then filed 1041 for the trust - but with 0 income and a statement that this is a grantor trust and all income is reported to the grantor. This was the first year and we just followed CPA's recommendation. Is this something we shouldn't do going forward? Is there a downside to filing 1041 except $500 that CPA charges?Lee_WSP wrote: ↑Sat Oct 08, 2022 12:14 pmGrantor trusts are taxed to the grantor, they do not file a 1041, they are not treated as separate taxpaying entities, they are not affected by the special trust tax rules until the grantor status is terminated.Theseus wrote: ↑Sat Oct 08, 2022 11:38 am Thank you to all the experts that are weighing in here.
A question from a lay person. If we have a grantor trust (irrevocable), then the income from the trust is taxed to the grantor. But you are saying that if the trust has a loss, then the loss can not be passed to the grantor to offset grantor's other gains?
Not sure I am clear in my question, but if it is unclear please let me know.
Re: Trust/Tax question
No downside.Theseus wrote: ↑Sat Oct 08, 2022 12:43 pmBased on some recommendation we got the EIN. And the CPA then filed 1041 for the trust - but with 0 income and a statement that this is a grantor trust and all income is reported to the grantor. This was the first year and we just followed CPA's recommendation. Is this something we shouldn't do going forward? Is there a downside to filing 1041 except $500 that CPA charges?Lee_WSP wrote: ↑Sat Oct 08, 2022 12:14 pmGrantor trusts are taxed to the grantor, they do not file a 1041, they are not treated as separate taxpaying entities, they are not affected by the special trust tax rules until the grantor status is terminated.Theseus wrote: ↑Sat Oct 08, 2022 11:38 am Thank you to all the experts that are weighing in here.
A question from a lay person. If we have a grantor trust (irrevocable), then the income from the trust is taxed to the grantor. But you are saying that if the trust has a loss, then the loss can not be passed to the grantor to offset grantor's other gains?
Not sure I am clear in my question, but if it is unclear please let me know.
Re: Trust/Tax question
Thank you. If we stop filing 1041 going forward is there a downside to that? I rather not pay $500 for basically an empty form.Lee_WSP wrote: ↑Sat Oct 08, 2022 12:45 pmNo downside.Theseus wrote: ↑Sat Oct 08, 2022 12:43 pmBased on some recommendation we got the EIN. And the CPA then filed 1041 for the trust - but with 0 income and a statement that this is a grantor trust and all income is reported to the grantor. This was the first year and we just followed CPA's recommendation. Is this something we shouldn't do going forward? Is there a downside to filing 1041 except $500 that CPA charges?Lee_WSP wrote: ↑Sat Oct 08, 2022 12:14 pmGrantor trusts are taxed to the grantor, they do not file a 1041, they are not treated as separate taxpaying entities, they are not affected by the special trust tax rules until the grantor status is terminated.Theseus wrote: ↑Sat Oct 08, 2022 11:38 am Thank you to all the experts that are weighing in here.
A question from a lay person. If we have a grantor trust (irrevocable), then the income from the trust is taxed to the grantor. But you are saying that if the trust has a loss, then the loss can not be passed to the grantor to offset grantor's other gains?
Not sure I am clear in my question, but if it is unclear please let me know.
Re: Trust/Tax question
You could just do it yourself.Theseus wrote: ↑Sat Oct 08, 2022 12:47 pmThank you. If we stop filing 1041 going forward is there a downside to that? I rather not pay $500 for basically an empty form.Lee_WSP wrote: ↑Sat Oct 08, 2022 12:45 pmNo downside.Theseus wrote: ↑Sat Oct 08, 2022 12:43 pmBased on some recommendation we got the EIN. And the CPA then filed 1041 for the trust - but with 0 income and a statement that this is a grantor trust and all income is reported to the grantor. This was the first year and we just followed CPA's recommendation. Is this something we shouldn't do going forward? Is there a downside to filing 1041 except $500 that CPA charges?Lee_WSP wrote: ↑Sat Oct 08, 2022 12:14 pmGrantor trusts are taxed to the grantor, they do not file a 1041, they are not treated as separate taxpaying entities, they are not affected by the special trust tax rules until the grantor status is terminated.Theseus wrote: ↑Sat Oct 08, 2022 11:38 am Thank you to all the experts that are weighing in here.
A question from a lay person. If we have a grantor trust (irrevocable), then the income from the trust is taxed to the grantor. But you are saying that if the trust has a loss, then the loss can not be passed to the grantor to offset grantor's other gains?
Not sure I am clear in my question, but if it is unclear please let me know.
If there is any income associated with that ein, you’d want to file. I’ll defer to the tax experts as to other potential issues.
Re: Trust/Tax question
Why wouldn’t the trust tax return cancel out the gains and losses to the extent possible instead of putting them on a K-1?MarkNYC wrote: ↑Fri Oct 07, 2022 5:26 pm The character and amount of trust income that can be passed through and taxed to a beneficiary is determined by, and limited to, Distributable Net Income (DNI). Per IRC Section 643(a)(3), capital losses are excluded from DNI except to the extent they are used to offset capital gains.
If there is another trust for the same beneficiary, can excess losses be passed to the beneficiary and cancel the gains from the other trust’s K-1?
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Re: Trust/Tax question
That's literally what it says. Losses can be used to offset gains, but excess losses are excluded from DNI.celia wrote: ↑Sat Oct 08, 2022 2:31 pmWhy wouldn’t the trust tax return cancel out the gains and losses to the extent possible instead of putting them on a K-1?MarkNYC wrote: ↑Fri Oct 07, 2022 5:26 pm The character and amount of trust income that can be passed through and taxed to a beneficiary is determined by, and limited to, Distributable Net Income (DNI). Per IRC Section 643(a)(3), capital losses are excluded from DNI except to the extent they are used to offset capital gains.
If there is another trust for the same beneficiary, can excess losses be passed to the beneficiary and cancel the gains from the other trust’s K-1?
Re: Trust/Tax question
The General Method for grantor trust income tax reporting is obtaining a trust EIN and filing Form 1041 that is otherwise blank except for an attached Grantor Tax Information Letter that details the amounts of income, loss, deductions and credits directly taxable to the grantor. This is the method your CPA chose.Theseus wrote: ↑Sat Oct 08, 2022 12:47 pmThank you. If we stop filing 1041 going forward is there a downside to that? I rather not pay $500 for basically an empty form.Lee_WSP wrote: ↑Sat Oct 08, 2022 12:45 pmNo downside.Theseus wrote: ↑Sat Oct 08, 2022 12:43 pmBased on some recommendation we got the EIN. And the CPA then filed 1041 for the trust - but with 0 income and a statement that this is a grantor trust and all income is reported to the grantor. This was the first year and we just followed CPA's recommendation. Is this something we shouldn't do going forward? Is there a downside to filing 1041 except $500 that CPA charges?Lee_WSP wrote: ↑Sat Oct 08, 2022 12:14 pmGrantor trusts are taxed to the grantor, they do not file a 1041, they are not treated as separate taxpaying entities, they are not affected by the special trust tax rules until the grantor status is terminated.Theseus wrote: ↑Sat Oct 08, 2022 11:38 am Thank you to all the experts that are weighing in here.
A question from a lay person. If we have a grantor trust (irrevocable), then the income from the trust is taxed to the grantor. But you are saying that if the trust has a loss, then the loss can not be passed to the grantor to offset grantor's other gains?
Not sure I am clear in my question, but if it is unclear please let me know.
There are two alternative reporting methods. The first and most common is to not obtain a trust EIN and have all trust income items reported under the SSN of the grantor. Then no 1041 is required.
The second alternative method can be used with a trust EIN, but it imposes additional reporting requirements on the trustee. After receiving 1099s in the name and EIN of the trust, the trustee must file with the IRS (and grantor) similar 1099s for income and gross proceeds listing the name and SSN of the grantor as payee. If the trustee is not the same person as the grantor, the trustee must still provide the grantor with a tax information letter or similar statement detailing the items and amounts taxable to the grantor. Sometimes this involves as much or more work as filing the 1041 itself.
After filing a grantor trust 1041 for one or more years under the general method, if the decision is made to switch to the second alternative method, a "final year" 1041 must be filed and on the top of page one of the form should be written "Pursuant to Treas. Reg. 1.671-4(g) this is the final Form 1041 for this grantor trust."
Re: Trust/Tax question
Thank you for such a crystal clear answer. This is SO helpful !! The way you described in the very first paragraph is exactly what our CPA has done and I will just continue that.MarkNYC wrote: ↑Sat Oct 08, 2022 5:30 pmThe General Method for grantor trust income tax reporting is obtaining a trust EIN and filing Form 1041 that is otherwise blank except for an attached Grantor Tax Information Letter that details the amounts of income, loss, deductions and credits directly taxable to the grantor. This is the method your CPA chose.Theseus wrote: ↑Sat Oct 08, 2022 12:47 pmThank you. If we stop filing 1041 going forward is there a downside to that? I rather not pay $500 for basically an empty form.Lee_WSP wrote: ↑Sat Oct 08, 2022 12:45 pmNo downside.Theseus wrote: ↑Sat Oct 08, 2022 12:43 pmBased on some recommendation we got the EIN. And the CPA then filed 1041 for the trust - but with 0 income and a statement that this is a grantor trust and all income is reported to the grantor. This was the first year and we just followed CPA's recommendation. Is this something we shouldn't do going forward? Is there a downside to filing 1041 except $500 that CPA charges?
There are two alternative reporting methods. The first and most common is to not obtain a trust EIN and have all trust income items reported under the SSN of the grantor. Then no 1041 is required.
The second alternative method can be used with a trust EIN, but it imposes additional reporting requirements on the trustee. After receiving 1099s in the name and EIN of the trust, the trustee must file with the IRS (and grantor) similar 1099s for income and gross proceeds listing the name and SSN of the grantor as payee. If the trustee is not the same person as the grantor, the trustee must still provide the grantor with a tax information letter or similar statement detailing the items and amounts taxable to the grantor. Sometimes this involves as much or more work as filing the 1041 itself.
After filing a grantor trust 1041 for one or more years under the general method, if the decision is made to switch to the second alternative method, a "final year" 1041 must be filed and on the top of page one of the form should be written "Pursuant to Treas. Reg. 1.671-4(g) this is the final Form 1041 for this grantor trust."
Re: Trust/Tax question
Not sure I understand the first question, specifically, what is meant by having "the trust tax return cancel out the gains and losses"? In any case, the relevant bottom line is that net capital losses in the trust cannot be passed out to the beneficiary, except in the final year of the trust.celia wrote: ↑Sat Oct 08, 2022 2:31 pmWhy wouldn’t the trust tax return cancel out the gains and losses to the extent possible instead of putting them on a K-1?MarkNYC wrote: ↑Fri Oct 07, 2022 5:26 pm The character and amount of trust income that can be passed through and taxed to a beneficiary is determined by, and limited to, Distributable Net Income (DNI). Per IRC Section 643(a)(3), capital losses are excluded from DNI except to the extent they are used to offset capital gains.
If there is another trust for the same beneficiary, can excess losses be passed to the beneficiary and cancel the gains from the other trust’s K-1?
The answer to your second question is --- No.
Re: Trust/Tax question
If it's a grantor trust, nothing "passes." The grantor is treated as the owner for income tax purposes, as if the trust did not exist. The income, deductions, gains, losses and credits are the grantor's.Theseus wrote: ↑Sat Oct 08, 2022 11:38 am Thank you to all the experts that are weighing in here.
A question from a lay person. If we have a grantor trust (irrevocable), then the income from the trust is taxed to the grantor. But you are saying that if the trust has a loss, then the loss can not be passed to the grantor to offset grantor's other gains?
Not sure I am clear in my question, but if it is unclear please let me know.
Most grantor trusts use the grantor's social security number since it's simpler. This has been allowed for most grantor trusts since 1995. However, some grantor trusts do it the way you did it. Some clients and some accountants prefer that method; and some accountants aren't aware of the 1995 change in the regulations.Theseus wrote: ↑Sat Oct 08, 2022 12:43 pm ...
Based on some recommendation we got the EIN. And the CPA then filed 1041 for the trust - but with 0 income and a statement that this is a grantor trust and all income is reported to the grantor. This was the first year and we just followed CPA's recommendation. Is this something we shouldn't do going forward? Is there a downside to filing 1041 except $500 that CPA charges?
Re: Trust/Tax question
Suppose the trust had $4,000 of losses and $5,000 of gains. It sounds like the trust’s tax preparer can either use the losses to cancel out part of the gain and just put a $1,000 gain (minus a small deduction???) on the K-1. Or she could put the full losses and gains (minus the same deduction) on the K-1. But why would someone do the latter choice other than that’s an option?MarkNYC wrote: ↑Sat Oct 08, 2022 7:57 pmNot sure I understand the first question, specifically, what is meant by having "the trust tax return cancel out the gains and losses"? In any case, the relevant bottom line is that net capital losses in the trust cannot be passed out to the beneficiary, except in the final year of the trust.celia wrote: ↑Sat Oct 08, 2022 2:31 pmWhy wouldn’t the trust tax return cancel out the gains and losses to the extent possible instead of putting them on a K-1?MarkNYC wrote: ↑Fri Oct 07, 2022 5:26 pm The character and amount of trust income that can be passed through and taxed to a beneficiary is determined by, and limited to, Distributable Net Income (DNI). Per IRC Section 643(a)(3), capital losses are excluded from DNI except to the extent they are used to offset capital gains.
I wonder if I’m missing some concept here.
Re: Trust/Tax question
It’s the same concept for individuals. You have to use the loss to offset any gains first. You cannot just keep carrying over losses if you realize any gains in the tax year.celia wrote: ↑Sat Oct 08, 2022 10:59 pmSuppose the trust had $4,000 of losses and $5,000 of gains. It sounds like the trust’s tax preparer can either use the losses to cancel out part of the gain and just put a $1,000 gain (minus a small deduction???) on the K-1. Or she could put the full losses and gains (minus the same deduction) on the K-1. But why would someone do the latter choice other than that’s an option?MarkNYC wrote: ↑Sat Oct 08, 2022 7:57 pmNot sure I understand the first question, specifically, what is meant by having "the trust tax return cancel out the gains and losses"? In any case, the relevant bottom line is that net capital losses in the trust cannot be passed out to the beneficiary, except in the final year of the trust.celia wrote: ↑Sat Oct 08, 2022 2:31 pmWhy wouldn’t the trust tax return cancel out the gains and losses to the extent possible instead of putting them on a K-1?MarkNYC wrote: ↑Fri Oct 07, 2022 5:26 pm The character and amount of trust income that can be passed through and taxed to a beneficiary is determined by, and limited to, Distributable Net Income (DNI). Per IRC Section 643(a)(3), capital losses are excluded from DNI except to the extent they are used to offset capital gains.
I wonder if I’m missing some concept here.
Re: Trust/Tax question
It's sometimes possible to pass the capital gains through to the beneficiaries but that's complicated. In most cases, except in the final year, capital gains (net of capital losses) are taxable at the trust level.celia wrote: ↑Sat Oct 08, 2022 10:59 pm ...
Suppose the trust had $4,000 of losses and $5,000 of gains. It sounds like the trust’s tax preparer can either use the losses to cancel out part of the gain and just put a $1,000 gain (minus a small deduction???) on the K-1. Or she could put the full losses and gains (minus the same deduction) on the K-1. But why would someone do the latter choice other than that’s an option?
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