Overriding Qualified Dividend Allocation on Final Return Form 1041

[gretchenbuchanan]

I have a final complex trust return which did not actually distribute until January 2023.  Client wants to file final tax return in 2022 and pay all tax within trust. No distributions in 2022. How do I override the allocation of qualified dividends so that the trust is allocated all and none to beneficiaries, line 2b? I would like to get the benefit of qualified dividends in the Schedule D tax computation. When return is marked final, it automatically assumes these are all beneficiary.

[gretchenbuchanan]

Technical support found the answer for me today. On screen 2.1 in estate and trust information, the very last option right above bankruptcy estate allows you to designate how much qualified dividend is allocated to the beneficiaries. I put a -1 in the box and now all of the qualified dividend is allocated to the trust and it gets capital gains rate benefit for that allocation.

[sjrcpa]

A final return means all income and principal has been distributed, ergo income passes out on the K-1s.

[gretchenbuchanan]

This one did not distribute anything until 2023, so all income belongs to the trust which should get the benefit of capital gains rates on its qualified dividends. Client prefers to wrap up trust in 2022 and insists the distribution is the only activity in 2023. It should have no income reported to it in 2023. Thus, we are marking 2022 final even though not technically final.

[sjrcpa · Accepted solution]

You're not doing this correctly. Either they're making a 663(b) election and the income flows out on K-1s; or 2023 is the final return.

[abctax55]

".....Client prefers"

You can't always get what you want.   Most of my clients would prefer to not pay taxes; that's not an option. 

Listen to Susan.