Stuart Bronstein wrote:
- quote -

But the 1099 was a mistake, and should be fixed. I know (?) you can't go
back a change from Married filing Joint to Individual after the fact
just because you decide it will save money.
But in this case, a mistake was made, not a trivial one. Once the 1099
is corrected, the 1041 and K-1 may need fining as well, but if the trust
is 'simple', it should zero out each year, and the beneficiary should be
happy to pay tax at her lower rate. And no offense, she should find a
competent trustee and tax preparer. And the 1099-cutter as well, who was
that?

Really, this shouldn't be this complicated. The first time, it's new,
but the process is usually pretty straightforward.

Joe

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"removeps-groups[at]yahoo.com" <removeps-groups[at]yahoo.com> wrote:
- quote -

If I said that then must have been slipped something before I posted
that. The trust's income was distributed to the beneficiary when paid,
and it was mistakenly listed by the payor under the beneficiary's
social security number on the 1099.

The tax preparer included the income on the beneficary's tax return
because that's how it was listed on the 1099, and didn't file a trust
return. When I told her the income actually belonged to the trust, she
redid the return, saying that resulted in an additional $20,000 in tax.
It didn't make sense to me.

Stu

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On Jun 13, 7:32*pm, Stuart Bronstein <spamt...[at]lexregia.com> wrote:

- quote -

I'm confused. Your first post ("But take a slightly different
situation. The trust does not distribute the income in the current
year, but retains it") says that the trust did not make any
distributions but retained the profits, so the income should not have
been on the beneficiaries' 1040.

What is the penalty is a trust is required to make a distribution but
does not? Is it 50% of the amount that should have been distributed?

If for example the trust had profits in 2006 and was not required to
make distributions and did not, it paid taxes on the profits at the
higher trust rates. So if the trust distributes the profits in 2007,
will the beneficiary have to pay taxes on the 2007 1040, and will the
trust get to take a deduction on the amount distributed? I think the
answers are no, no. How does one report the return of capital on the
1041 and 1040?

And say the trust made 100k in 2006 and 70k in 2007. If in 2007 it
distributes 80k, how much of that 80k is taxable on the beneficiaires
1040? I would imagine 70k is taxable, and 10k is a return of capital,
with 90k of capital remaining to be returned.

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<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

joetaxpayer wrote:
....
- quote -


I don't know where it comes from either, specifically, now that I went
back and reread the Pub which does specifically not include simple
trusts. The preparer I use for the trust of which I am trustee also
believes and has always operated on the basis of distributions do have
to be made within a window (I don't recall now for sure whether he
thinks we have the extra five days or not). It is indeed, a bit of a
scramble because supporting documentation isn't always available even
from mutual funds at year end as revised 1099's straggle in and other
investments are much less prompt than they in getting year end data
provided.

Not that any of this has any real bearing on Stu's real problem but it
will be interesting to hopefully hear how it all works out in the end...

--

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<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

Mark Bole wrote:

- quote -

I agree with the points you make here, Mark. Earlier you asked Stu to
confirm whether the trust was simple or complex. I agree that's the
first data point needed. Next, the trust should state the terms under
which distributions are made.
I cannot find it, but am thinking that a simple trust had an end of
February (for calendar year trusts) distribution requirement. Of course,
a year end distribution by any [mutual] funds would be known in time for
a 12/31 distribution to the beneficiary. I imagine trustees have a bit
of a scramble to perform the task in the first few weeks of the year.

Back to Stu's issue. A simple trust should be all pass-thru as you
suggest. a complex trust should only pay tax on what's actually
retained. The tax preparer(s) and trustee(s) need to get their act(s)
together. This can be an expensive mistake.

Joe
www.blog.joetaxpayer.com

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<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

dpb wrote:
- quote -

The 65-day election specifically applies to estates and complex trusts.
I have looked in multiple places and found no such rule one way or the
other for simple trusts.

One reliable book I have indicates that Section 652(a) of the tax code
talks about gross income to the beneficiaries "whether distributed or
not", meaning the accounting for the tax year can be completed before
actually distributing the income (otherwise, how would you know how much
to distribute?)

On to the larger issue, Stu seems to have found the real problem, namely
not taking the distribution deduction on the trust tax return. As a
pass-through entity, normally one would not expect a simple trust to
show any taxable income to the trust itself. (But I'm sure there are
exceptions I haven't run into, I don't claim to be a trust expert by any
means).

-Mark Bole

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<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

joetaxpayer <joetaxpayer[at]nospam.com> wrote:
- quote -

I'm not sure how it happened. I think they just made a mistake and
gave them the wrong number.

- quote -

Turns out that what I thought of as the main problem wasn't
depreciation. The Block preparer included the same income in both
the 1040 and the 1041 and didn't deduct it from either - it was
counted twice, and that resulted in additional tax of $20,000.

Stu

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dpb <none[at]non.net> wrote:
- quote -

In this case the income was actually paid out to the beneficiary in
2007. And it was paid mistakenly under her SS#, for which she was
given a 1099. That's part of the problem.

- quote -

The trustee likes this particular preparer and has used her personally
in the past. She switched from the preparer I originally suggested to
her because H&R's price is lower.

Stu

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Stuart Bronstein wrote:

- quote -

I see. I take it this is not a brokerage account? The trusts I've had
any dealings with have their own EIN, and don't reference the
beneficiary's SSN at all. (I just peeked at one such trust. The Trust
document itself does not reference a SSN). How did this mixup occur?

- quote -

Depreciation should first net against income (I assume you're talking
rental property?) p42 of the instructions for 1041 discuss the K1, and
it then refers to other rules regarding depreciation in excess of
income. Not a simple matter. I'm not surprised H&R Block didn't get this
right.

Joe

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Mark Bole wrote:
- quote -


- quote -

IIRC, the fiduciary has 65 days from the end of the tax year to make
payments or credits to the beneficiary and be counted as being paid or
credited on the last day of that tax year.

To straighten this out definitely need to start w/ determining the
actual terms of the trust and then go from there.

I know as trustee, how it works when one does it on time and actually
makes the distributions; I have no idea what happens in a case where
distributions aren't paid (nor taxes, either) and what would be the
proper way in which to approach it.

- quote -

Nice in theory, how well it will work in practice I don't know...

If OP were in a place like here, there is no such thing as a permanent
or "high-end" H&RB office and I've no idea how one would get ahold of
such an animal...

--

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Stuart Bronstein wrote:
- quote -

And I remember getting confused when I tried to be helpful back in the
earlier thread, too!

At the risk of stating the obvious, whether this is a simple or complex
trust really needs to be straightened out. If a simple trust and all
income is required to be distributed "currently", then I don't think
it's too late to send out checks for 2007, and report the distributed,
taxable income via K-1's. The actual constructive receipt by the
beneficiaries does not have to happen prior to Dec 31st.

H&R Block is a large enough organization that there should be at least a
few very knowledgeable and experienced people in the year-round or
high-end offices, so it should be possible for the client to ask
management to get someone else involved at a higher level if there is
evidence that the preparation is being handled poorly. Block provides
some basic guarantees on their work, so it is in their interest to get
this handled properly.

-Mark Bole

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<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

joetaxpayer <joetaxpayer[at]nospam.com> wrote:
- quote -

The 2007 returns weren't filed yet. The trustee took them to someone
at H&R Block who made a mistake, and I'm working with another
preparer to get it straightened out.

The current preparer wants to file the 1041 claiming all the trust's
income for tax purposes, even though it passed through to the
beneficiary (the surviving spouse). One problem was that the 1099
was reported on the beneficiary's SS# rather than on the trust's
EID#. So that needs to be straightened out.

Now, trust distributions are reported on a K-1 rather than a 1099?
Does that mean the trust can distribute depreciation as well as
income to the beneficiary?

- quote -

Thanks, that's what I was hoping. I'll look into it a bit more.

- quote -

Nobody wants to do it. It's a matter of straightening out one
mistake made by the payor of income that needs to be recognized,
compounded by the mistakes of an H&R Block preparer.

- quote -

This is the same matter I asked about a few weeks ago, when teh HRB
preparer did the returns properly, and then did them again but giving
the trust the beneficiary's income and the beneficiary the trust's
income (the funds were distributed so the beneficiary should
recognize it all in any case). The preparer determined that if the
returns were prepared the right way the total tax would be about
$20,000 more than if done the other way. It made no sense to me.

Now I discover that in doing the returns both ways, in the second
scenario she included the same $100,000 of income on both returns and
deducted it on neither.

Stu

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Stuart Bronstein wrote:

- quote -

Yes. The trust passes all income along. Bene's get K1s and pay the tax
on the income.

- quote -

Huh? 2007 is over. The trustee, if a complex trust not 'having' to
distribute income, retained it, and the trust paid the tax. Now it's all
principal (including unrealized gains/losses). Now, in 2008, it has
three things to do, take the 2008 income, and distribute it or not
(that's two) and distribute any principal.

- quote -

It's a distribution of principal, if I read this right.

- quote -

There is a requirement that the trustee be slapped with a white glove.
This is contrary to correct bookkeeping. You go through the 1041 set and
if income is distributed via K1, the beneficiaries pay the tax, and the
trust, not. This question sounds like the trustee deciding to have the
trust retain earnings (and therefore pay tax at the trust rates) but
distribute principal to the bene's. I am not confused so much as I am
shaking my head why one would do this. I know some kind soul might have
a scenario for me that offers "but the K1 income to this beneficiary
will have such and such an impact....". I don't claim to know it all, I
am certain I don't. But such a scenario (regarding the trust) seems
unlikely.

Joe
www.blog.joetaxpayer.com

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Here's another one I hope someone has some input from.

An irrevocable trust has taxable income, which is recognizes and is
included on a 1041. All income is distributed to the beneficiaries so
the trust gets a deduction in the amount of the distribution and ends
up with no taxable income. Ok so far?

But take a slightly different situation. The trust does not distribute
the income in the current year, but retains it. Then it distributes
the income the following year. Assuming that the money became part of
the principal, is it deducted from the trust's income the following
year and included in the beneficiary's? Or is it treated as a gift or
distribution of principal?

To confuse this a bit further, what happens if the trust recognizes the
trust income, distributes the income but does not take the deduction in
the current year?

Thanks for your insight.

Stu

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