are you sure it not the fees you have listed on the front page, like attorney or accountant fees, reducing the beneficiaries shares?

Thank you for getting back to me.

There are no fees.  I prepare the returns myself.  It is deefinitely the taxes that being netted against other income.

1041, Page 2, Sch B, Line 9 is where you enter the amount to be distributed out to the K-1s, is the tax reducing that amount?

Is it income tax paid in 2025?

Is there a place to say that is corpus?

Im playing with a  dummy return

Ive got 10k in interest and 5500 in capital gains

The 5500 in cap gains is taxed to the trust, which gives me a tax liability of $293,

my K-1 shows the full 10k of interest on it, its not reduced by the taxes

oh, wait, you mean the NY K-1 is reduced?  Im only looking at federal, I dont have NY trust product installed.

No.  In fact I increased trust accounting income by the amount of taxes chargeable to principal but the income distribution deduction that is coming through is net of the tax because it is a lesser amount than trust accounting income as adjusted.

The lesser amount is equal to adjusted taxable income which takes ito account the state taxes paid on the capital gais.

I could do an override, but then there will be a disconnect.

But the tax liability is also being deducted by the trust which is creating the problem because of its impact on adjusted total income.

If I eliminate the deduction for taxes, adjusted total income increases with the result that I am still getting a number less than what I should be getting for the income distribution deduction.

I know the number I want and can force it, but then there will be a disconnect between that number and other numbers on the return.

No, I am only dealing with the federal at the momet.

So you have state and local income taxes paid entered in that deduction allocation smart worksheet on the front page?  That would reduce the income pushed out to the benes.

I thought you meant the 2025 federal tax due is reducing the income, and I can't replicate that scenario.

No.  It is the state income tax that is being deducted at line 11 of the front page of the return which is also offsetting the dividends and interest reportable by the beneficiary.

It is the state income tax that is being deducted at line 11 of the front page of the return which is also offsetting the dividends and interest reportable by the beneficiary.

Sounds right to me.  DNI doesn't care whether the deductions are charged to corpus or income.  

That sounds correct to me, anything you put in that box will offset those other things on the K-1, this has 10k in interest and thats being reduced by the state taxes from Line 11

When I eliminate the state tax deduction at line 11, I get the right flow through to the beneficiary.  And while there is no separately stated state income tax deduction at line 11, the distribution deduction is increased by a like amount which from a bottom line standpoint is the right place to be.

Maybe that is the answer - eliminate the line item deduction for state taxes with a corresponding increase in the distribution deduction.  Net/net, the trust is where it should be as is the beneficiary although there is no separately stated state tax deduction at line 11.

I think that is how I will go.

Thanks.

I agree that DNI is not impacted by state income taxes paid wheter chargeable to income or corpus, but the distribution deduction is being impacted.  If I leave the state income tax deductionat line 11, it looks like there is a double benefit ituitively to me -- the deduction at the trust level and an offset against income to be reported by the beneficiary.

I think the way to do it is as I suggested before -- eliminate the state deduction at the trust level which will have no impact on the trust's federal liability because there will be a corresponding increase in the trust's distribution deduction and you get to the right place at the beneficiary level.  Effectively, the trust is getting the benefit of the state tax deduction although it is not denominated as such on page 1 of the return and the beneficiary is picking up the correct amount of income because it is not being reduced by the state tax deduction.

Have you tried working through the DNI worksheet on Page 2 manually and see what you get?

I think  @BobKamman  is correct.

In other words, you're going to make the beneficiary pay more tax because you mistakenly believe trust accounting is the same as tax accounting?

This looks like a double benefit to me because both the trust and the beneficiary's liabilities are being reduced by the same deduction item.

That is the issue.

Isn't there a double benefit if there is both a deduction for the state tax at the trust level and an offset in a like amount against the income that the beneficiary must report?  It looks that way to me.

Yes, I have worked through the DNI worksheet.  When I do, the amount to be picked up by the beneficiary is reduced by the state income taxes paid by the trust while the trust is getting a deduction in a like amount on page 1 of the return. 

Effectively, you get to the same place from a total liability standpoint of the trust if you eliminate the deduction at line 11 because as I indicated before the income distribution deduction is increased by a like amount.

The beneficiary is then reporting his distributive share of incoe without an offset for the state income tax.

Otherwise, it looks like a double benefit to me which seems problematic.

You aren't providing any numbers, but let's assume the deduction for state income tax is $500 and the distribution to the beneficiary was $10,000.

Your choice on the front of the 1041 for total deductions is either $500 tax and $9,500 DNI, or $0 tax and $10,000 DNI.

Where is the double benefit?  The trust pays the same tax, either way.  If it chooses not to claim the allowable deduction for state income tax, the beneficiary needlessly pays tax on $500.  Something seems to be going on here, are there other issues between you and the beneficiary?  

Is the tax being reduced on the 1041 when you put those state taxes in? 

On my dummy return, the tax stays the same regardless how much I enter for state and local taxes, only the K-1s change.  So I dont think anything is double dipping.  The tax on those capital gains is the same.

There is nothing going on between me and the beneficiary as I am the beneficiary.

There is no double benefit to the trust as the trust is getting one deduction for the amount of state tax paid either in the form of a separately stated line item for state income taxes paid or an increased distribution deduction.  The bottom line is that the trust is left with more or less the same tax liability either way.

What is bothering me is that both the trust is getting a benefit in the form of a tax deduction and the beneficiary is getting a benefit in a like amount (subject to tax respective tax brackets) through a reduction in the amount that the beneficiary must report as his distributive share of trust income.

I do very much appreciate your input.

No, the trust's tax liability pretty much stays the same.

What is bothering me conceptually is that the same taxable item is reducing both the trust's liaiblity and the beneficiary's laibility.

"the trust's tax liability pretty much stays the same."

"the same taxable item is reducing . . . the trust's liability"

How are these two observations consistent?

What do you mean it "pretty much stays the same"?

I can add 500 in state taxes or 5000 in state taxes and the tax on the 1041 stays exactly the same. 

Now if I input more state taxes than ALL the income on the return, the k-1 zeros out and the 1041 does get some benefit, so maybe thats what you see happening.

I'm not seeing any program defect here.

They aren't necessarily consistent.

I haven't investigated the "why" at this point, but in one of the alternatives -- taking a deduction for state income taxes vs. not doing so and increasing the income distribution deduction in a like amount -- appears to result in a slight ($27) difference in overall liability due to the triggering of the tax on net passive investment income in one of the alternatives.  I am not going to bother to confirm whether this is correct until I know which alternative is the correct one.

Intuitively, it strikes me that both the trust and its beneficiary's getting a benefit from the same deduction for state income taxes paid smacks of double dipping.  I recognize the separate legal status of the trust and its beneficiary may come into play, but nevertheless it gives me pause.

welp, Ive already wasted more than $27 worth of time on this, Im out.   

That's fine, but the $27 is not the issue. 

The issue is the tax impact if both the trust (by way of a deduction each year) and its beneficiary (through a corresponding reduction in the amount of distributable net income that must be reported) can realize a tax benefit for the state income taxes paid year after year after year.  A bit more is at stake than $27 particularly since I have three trusts in all for which I have the same question.

By all means do all three trusts the wrong way.  Much more likely to inspire an IRS preparer project.  

Now joining @Just-Lisa-Now-  We can lead horses to water but we can't make them drink.  

So, just to be clear, the trust can take the deduction and the distributive share of income to be reported by a beneficiary can be reduced by the amount of income taxes paid by the trust on its capital gains in a given year.

Sorry if I strike you as appearing a little dense.