General Instructions
Use Schedule K-1 (Form 1041) to report the beneficiary's share of income, deductions, and credits from a trust or a decedent's estate.
Beneficiary's Identifying Number
As a payer of income, you
are required under section 6109 to request and provide a proper identifying
number for each recipient of income. Enter the beneficiary's number on the respective
Schedule K-1 when you file Form 1041. Individuals and business recipients are
responsible for giving you their taxpayer identification numbers upon request.
You may use Form W-9, Request for Taxpayer Identification Number and
Certification, to request the beneficiary's identifying number.
Penalty. Under section 6723, the payer is charged a $50 penalty for each
failure to provide a required taxpayer identification number, unless reasonable
cause is established for not providing it. Explain any reasonable cause in a
signed affidavit and attach it to this return.
Tax Shelter's Identification Number
If the estate or trust is a tax shelter, is involved in a tax shelter, or is considered to be the organizer of a tax shelter, there are reporting requirements under section 6111 for both the fiduciaries and the beneficiaries.
See Form 8264, Application for Registration of a Tax Shelter, and Form 8271, Investor Reporting of Tax Shelter Registration Number, and their related instructions for information regarding the fiduciary's reporting requirements.
Substitute Forms
You do not need prior IRS approval for a substitute Schedule K-1 (Form 1041) that follows the specifications for filing substitute Schedules K-1 in Pub. 1167, Substitute Printed, Computer-Prepared, and Computer-Generated Tax Forms and Schedules, or is an exact copy of an IRS Schedule K-1. You must request IRS approval to use other substitute Schedules K-1. To request approval, write to: Internal Revenue Service, Attention: Substitute Forms Program Coordinator, OP:FS:FP:F:CD, 1111 Constitution Avenue, NW, Washington, DC 20224.
Inclusion of Amounts in Beneficiaries' Income
Simple trust. The beneficiary of a simple trust must include in his or her gross income the amount of the income required to be distributed currently, whether or not distributed, or if the income required to be distributed currently to all beneficiaries exceeds the distributable net income (DNI), his or her proportionate share of the DNI. The determination of whether trust income is required to be distributed currently depends on the terms of the trust instrument and applicable local law. See Regulations section 1.652(c)-4 for a comprehensive example.
Estates and complex trusts. The beneficiary of a decedent's estate or complex trust must include in his or her gross income the sum of:
See Regulations section 1.662(c)-4 for a comprehensive example.
For complex trusts that have more than one beneficiary, and if different beneficiaries have substantially separate and independent shares, their shares are treated as separate trusts for the sole purpose of determining the amount of DNI allocable to the respective beneficiaries. For the estates of decedents dying after August 5, 1997, a similar rule applies to treat substantially separate and independent shares of different beneficiaries of an estate as separate estates. For examples of the application of the separate share rule, see the regulations under section 663(c).
Character of income. The beneficiary's income is considered to have the same proportion of each class of items entering into the computation of DNI that the total of each class has to the DNI (e.g., half dividends and half interest if the income of the estate or trust is half dividends and half interest).
Allocation of deductions. Generally, items of deduction that enter into the computation of DNI are allocated among the items of income to the extent such allocation is not inconsistent with the rules set out in section 469 and its regulations, relating to passive activity loss limitations, in the following order.
First, all deductions directly attributable to a specific class of income are deducted from that income. For example, rental expenses, to the extent allowable, are deducted from rental income.
Second, deductions that are not directly attributable to a specific class of income generally may be allocated to any class of income, as long as a reasonable portion is allocated to any tax-exempt income. Deductions considered not directly attributable to a specific class of income under this rule include fiduciary fees, safe deposit box rental charges, and state income and personal property taxes. The charitable deduction, however, must be ratably apportioned among each class of income included in DNI.
Finally, any excess deductions that are directly attributable to a class of income may be allocated to another class of income. However, in no case can excess deductions from a passive activity be allocated to income from a nonpassive activity, or to portfolio income earned by the estate or trust. Excess deductions attributable to tax-exempt income cannot offset any other class of income.
In no case can deductions be allocated to an item of income that is not included in the computation of DNI, or attributable to corpus.
Except for the final year, and for depreciation or depletion allocations in excess of income (see Rev. Rul. 74-530, 1974-2 C.B. 188), you may not show any negative amounts for any class of income, because the beneficiary generally may not claim losses or deductions from the estate or trust.
Gifts and bequests. Do not include in the beneficiary's income any gifts or bequests of a specific sum of money or of specific property under the terms of the governing instrument that are paid or credited in three installments or less.
Amounts that can be paid or credited only from income of the estate or trust do not qualify as a gift or bequest of a specific sum of money.
Past years. Do not include in the beneficiary's income any amounts deducted on Form 1041 for an earlier year that were credited or required to be distributed in that earlier year.
Beneficiary's Tax Year
The beneficiary's income from the estate or trust must be included in the beneficiary's tax year during which the tax year of the estate or trust ends. See Pub. 559 for more information, including the effect of the death of a beneficiary during the tax year of the estate or trust.
Specific Instructions
Enter the beneficiary's share of the taxable interest income minus allocable deductions.
Enter the beneficiary's share of ordinary dividends minus allocable deductions.
Line 3-Net Short-Term Capital Gain
Enter the beneficiary's share of the net short-term capital gain from line 14, column (1), Schedule D (Form 1041), minus allocable deductions. Do not enter a loss on line 3. If, for the final year of the estate or trust, there is a capital loss carryover, enter on line 13b the beneficiary's share of short-term capital loss carryover. However, if the beneficiary is a corporation, enter on line 13b the beneficiary's share of all short- and long-term capital loss carryovers as a single item. See section 642(h) and related regulations for more information.
Lines 4a through 4d-Net Long-Term Capital Gain
Enter the beneficiary's share of the net long-term capital gain from lines 15a through 15d, column (1), Schedule D (Form 1041), minus allocable deductions. Do not enter a loss on lines 4a through 4d. If, for the final year of the estate or trust, there is a capital loss carryover, enter on line 13c the beneficiary's share of the long-term capital loss carryover. (If the beneficiary is a corporation, see the instructions for line 3.) See section 642(h) and related regulations for more information.
Gains or losses from the complete or partial disposition of a rental, rental real estate, or trade or business activity that is a passive activity, must be shown on an attachment to Schedule K-1.
Line 5a-Annuities, Royalties, and Other Nonpassive Income
Enter the beneficiary's share of annuities, royalties, or any other income, minus allocable deductions (other than directly apportionable deductions), that is NOT subject to any passive activity loss limitation rules at the beneficiary level. Use line 6a to report income items subject to the passive activity rules at the beneficiary's level.
Enter the beneficiary's
share of the depreciation deductions attributable to each activity reported
on lines 5a and 6a. See the instructions on page 14 for a discussion of how
the depreciation deduction is apportioned between the beneficiaries and the
estate or trust. Report any AMT adjustment or tax preference item attributable
to depreciation separately on line 12a.
Note: An estate or trust cannot make an election under section 179 to
expense certain tangible property.
Enter the beneficiary's share of the depletion deduction under section 611 attributable to each activity reported on lines 5a and 6a. See the instructions on page 14 for a discussion of how the depletion deduction is apportioned between the beneficiaries and the estate or trust. Report any tax preference item attributable to depletion separately on line 12b.
Itemize the beneficiary's share of the amortization deductions attributable to each activity reported on lines 5a and 6a. Apportion the amortization deductions between the estate or trust and the beneficiaries in the same way that the depreciation and depletion deductions are divided. Report any AMT adjustment attributable to amortization separately on line 12c.
Line 6a-Trade or Business, Rental Real Estate, and Other Rental Income
Enter the beneficiary's share of trade or business, rental real estate, and other rental income, minus allocable deductions (other than directly apportionable deductions). To assist the beneficiary in figuring any applicable passive activity loss limitations, also attach a separate schedule showing the beneficiary's share of income derived from each trade or business, rental real estate, and other rental activity.
Lines 6b Through 6d
Caution: The limitations on passive activity losses and credits under section 469 apply to estates and trusts. Estates and trusts that distribute income to beneficiaries are allowed to apportion depreciation, depletion, and amortization deductions to the beneficiaries. These deductions are referred to as "directly apportionable deductions."
Rules for treating a beneficiary's income and directly apportionable deductions from an estate or trust and other rules for applying the passive loss and credit limitations to beneficiaries of estates and trusts have not yet been issued.
Any directly apportionable deduction, such as depreciation, is treated by the beneficiary as having been incurred in the same activity as incurred by the estate or trust. However, the character of such deduction may be determined as if the beneficiary incurred the deduction directly.
To assist the beneficiary in figuring any applicable passive activity loss limitations, also attach a separate schedule showing the beneficiary's share of directly apportionable deductions derived from each trade or business, rental real estate, and other rental activity.
Line 7-Income for Minimum Tax Purposes
Enter the beneficiary's share of the income distribution deduction figured on a minimum tax basis from line 27 of Schedule I.
Line 8-Income for Regular Tax Purposes
Enter the beneficiary's share of the income distribution deduction figured on line 15 of Schedule B. This amount should equal the sum of lines 1 through 3, 4c, 5a, and 6a.
Line 10-Estate Tax Deduction (Including Certain Generation-Skipping Transfer Taxes)
If the distribution deduction consists of any income in respect of a decedent, and the estate or trust was allowed a deduction under section 691(c) for the estate tax paid attributable to such income (see the line 19 instructions on page 17), then the beneficiary is allowed an estate tax deduction in proportion to his or her share of the distribution that consists of such income. For an example of the computation, see Regulations section 1.691(c)-2. Figure the computation on a separate sheet and attach it to the return.
List on a separate sheet the beneficiary's share of the applicable foreign taxes paid or accrued and the various foreign source figures needed to figure the beneficiary's foreign tax credit. See Pub. 514 and section 901(b)(5) for special rules about foreign taxes.
Enter any adjustments or tax preference items attributable to depreciation, depletion, or amortization that were allocated to the beneficiary. For property placed in service before 1987, report separately the accelerated depreciation of real and leased personal property.
Line 12d-Exclusion Items Enter the beneficiary's share of the adjustment for minimum tax purposes from Schedule K-1, line 9, that is attributable to exclusion items (Schedule I, lines 2 through 6, and 8).
Line 13a-Excess Deductions on Termination
If this is the final return of the estate or trust, and there are excess deductions on termination (see the instructions for line 22 on page 17), enter the beneficiary's share of the excess deductions on line 13a. Figure the deductions on a separate sheet and attach it to the return.
Excess deductions on termination occur only during the last tax year of the trust or decedent's estate when the total deductions (excluding the charitable deduction and exemption) are greater than the gross income during that tax year.
Generally, a deduction based on an NOL carryover is not available to a beneficiary as an excess deduction. However, if the last tax year of the estate or trust is also the last year in which an NOL carryover may be taken (see section 172(b)), the NOL carryover is considered an excess deduction on the termination of the estate or trust to the extent it is not absorbed by the estate or trust during its final tax year. For more information, see Regulations section 1.642(h)-4 for a discussion of the allocation of the carryover among the beneficiaries.
Only the beneficiary of an estate or trust that succeeds to its property is allowed to deduct that entity's excess deductions on termination. A beneficiary who does not have enough income in that year to absorb the entire deduction may not carry the balance over to any succeeding year. An individual beneficiary must be able to itemize deductions in order to claim the excess deductions in determining taxable income.
Lines 13b and 13c-Unused Capital Loss Carryover
Upon termination of the trust or decedent's estate, the beneficiary succeeding to the property is allowed as a deduction any unused capital loss carryover under section 1212. If the estate or trust incurs capital losses in the final year, use the Capital Loss Carryover Worksheet on page 34 to figure the amount of capital loss carryover to be allocated to the beneficiary.
Lines 13d and 13e-Net Operating Loss (NOL) Carryover
Upon termination of a trust or decedent's estate, a beneficiary succeeding to its property is allowed to deduct any unused NOL (and any AMT NOL) carryover for regular and AMT purposes if the carryover would be allowable to the estate or trust in a later tax year but for the termination. Enter on lines 13d and 13e the unused carryover amounts.
Line 14-Other Itemize on line 14, or on a separate sheet if more space is needed, the beneficiary's tax information not entered elsewhere on Schedule K-1. This includes the allocable share, if any, of:
Note: Upon termination of an estate or trust, any suspended passive activity losses (PALs) relating to an interest in a passive activity cannot be allocated to the beneficiary. Instead, the basis in such activity is increased by the amount of any PALs allocable to the interest, and no losses are allowed as a deduction on the estate's or trust's final Form 1041.