Bry
Level 3
‎12-07-2019 07:06 AM

Situation: The upper tier trust is the beneficiary of retirement income and there are $13,000 in state withholdings from 1099-Rs. The SALT deduction is limited to $10,000. However, the trust has two secondary tier trusts as its beneficiaries. I would like to deduct the state taxes on either those two trusts or on the individual returns of the beneficiaries of those two trusts. So basically, treat the upper tier trust as withholding state tax on behalf of the beneficiaries (either the secondary tier trusts or the individuals). 

Preferably, I'd like to deduct the income taxes directly on the individual returns. Is that allowed? Can you direct me to the tax law? 

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TaxMonkey
Level 8
‎12-07-2019 07:06 AM

IRC 164 allows you to deduct state tax which you paid. Given that it is the top tier trust that paid the taxes - presumably as a withholding from the retirement income, the beneficiaries would not have paid the taxes and therefore would not have a deduction for them.

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Bry
Level 3
‎12-07-2019 07:06 AM
What if your stance is that the trust is withholding the taxes on behalf of the individual? Similar to how an individual claims composite taxes paid on their behalf as itemized deductions?
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sjrcpa
Level 15
‎12-07-2019 07:06 AM
How would you justify that stance when the 1099-R with withholding comes from a 3rd party?

The more I know the more I don’t know.
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Bry
Level 3
‎12-07-2019 07:06 AM
What would be the difference between a partnership (3rd party) withholding state tax or paying composite tax for a non-resident partner? In that case, the partnership treats the withholding or composite tax as a distribution and does not deduct it on the 1065.
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sjrcpa
Level 15
‎12-07-2019 07:06 AM
The partnership is doing it for its partners. The trust is not withholding on behalf of its beneficiaries. The trust was witheld upon.

The more I know the more I don’t know.
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