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Archive for March 21st, 2007

Allocating Trust Income

Posted by taxguru on March 21, 2007


Subject: Fiduciary – Estates & Trusts
If a trust return 1041 has a total   of only $10,000.00 in taxable interest for the year, can the trust pass on a proportion of the tax obligation via k-1 to the beneficiaries, and show the remaining income for that same year on the 1041?  For example, show $8000.00 income on the trust return and show $2000.00 on the k-1’s to the beneficiaries.


The governing documents for the trust should either specify how the income is to be allocated and distributed or at least empower a designated person (usually the trustee) to make those decisions during the lifetime of the trust. 

Kerry Kerstetter


guess I was more concerned if the IRS would allow part of the income each year to be listed on the trust return and the rest of the income for that same year, and its tax obligation, be put on k-1’s to the beneficiaries
thanks for your comments


You can technically enter the income any way you want in regard to how much is passed through via K-1s and how much is taxed at the trust level.  However, if IRS were to ever question the methodology of the allocations, via a direct audit of the 1041 or more likely, a 1040 audit that reaches back to the 1041, you would have to provide the auditor with documentation (the trust’s governing documents) that the allocation was properly authorized and not just done arbitrarily.  If there is no such documentation, the auditor will be able to reclassify the income allocation to whichever method results in the highest taxes for the government, plus penalties and interest.

I hope this clarifies how this matter should be addressed.

Good luck.

Kerry Kerstetter


thanks you are very good at your work.  best to you




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