How to Prepare Supplements to Schedule K-1 for Estates and Trusts

While Schedule K-1for estates and trusts has space for much information, the fiduciary may want to give the beneficiaries more via supplements. The more information the better, including medical expenses, taxes, or any other deductible expenses paid on the beneficiary’s behalf.

Showing foreign tax allocations

Foreign stocks and bonds are increasingly common in trust and estate accounts, as are foreign taxes paid on foreign income. Be sure to pass out both foreign income to beneficiaries, and the corresponding amount of foreign taxes paid.

Show the foreign tax amount on Schedule K-1, line 14, using Code B. Label the foreign income, using Code H on the same line. Alternatively, attach a separate page to the back of the K-1, outlining both the foreign income earned, and foreign taxes paid.

Providing state tax information

Because most states have their own income tax, beneficiaries use their K-1 information to calculate their state income tax. Be sure to provide them with any differences that may impact their state returns, including the amount of U.S. Treasury interest and in-state versus out-of-state tax-exempt interest they’ve received in their distribution. The beneficiary’s residence is what determines what’s in-state against what’s out-of-state for beneficiaries.

Creating nominee Form 1099s

Sometimes, even when the trust or estate doesn’t have to file Form 1041, you still receive tax information from other sources. When you won’t be preparing a 1041, there won’t be a Schedule K-1 either. Instead, pass along any tax information you receive via a Form 1099 for income earned by property formerly owned by the trust or estate to the property’s new owners by issuing them a nominee Form 1099.

To prepare this form, copy the 1099 you’ve received, replacing the payer’s name and tax identification number (TIN) with the trust or estate’s name and TIN. Place the new owner’s name and TIN in the spaces reserved for the recipient. Be sure to give a copy to the new recipient, and file the top copy with the IRS together with Form 1096, which is just a transmittal sheet; the filing address appears on Form 1096.

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