First and final Michigan 1041 for a decedent estate

[Sue928]

This is a simple decedent estate 1041. Decedent was a Michigan resident. The only asset was a stock that was sold, no earnings from the stock. It was long term capital gain. The gain distributed to 3 beneficiaries, 2 Michigan residents, one Georgia resident. The federal 1041 shows no tax because everything flowed to the beneficiaries. This is a first and final return. The Michigan 1041 shows a small amount of tax owed by the estate. That does not seem correct because the beneficiaries have to claim their portion of capital gain reported on the K-1, which becomes part of their AGI. Why would the estate have to pay an estate tax AND the beneficiaries pay tax from the reported CG on their K-1s? It seems that the Michigan 1041 should be just an informational return with no tax due because everything is flowing to the beneficiaries. What box have I failed to check in ProSeries to make the Michigan 1041 report the same way as the federal 1041?

[IRonMaN]

Is it picking up a little tax on the GA beneficiary?

[Sue928]

I do not do the beneficiaries returns so, I don't know. The little bit of tax is showing on the MI-1041 as tax owed eventhough the federal 1041 shows zero tax because the CG flows to the 1041 K-1s. The Michigan 1041, also, should not show a tax owed because the beneficiaries have to take care of paying the tax on the CG on a personal level, federal and whatever state they reside.

[IRonMaN]

But where is the tax being generated - is it showing up on the GA beneficiary’s MI K-1?

[Sue928]

All of the MI-1041 K-1s are the same - blank, even the one for the individual who is a GA resident. There is nothing being reported to the beneficiaries on the Michigan return. How do I get the CG on the beneficiary MI1041 K-1s, as it is on the federal side where there is no tax to the estate but instead, flows to the beneficiary? I think that I must do something on the MI-1041D. Possibly Part 3? I have tried to allocated the amount to the beneficiaries instead of the fiduciary but, that only increases the amount of tax due. This should not be that hard!

These are the specifics:

Form 1041, line 4 = 2381 (CG)

Form 1041, line 9 = 2381 (taxable income)

Form 1041, line 17 = 2381 (adj total inc)

Form 1041, line 18 and 22 = 0 (inc distribution deduction)

Form 1041, line 23 = 2381 (taxable inc)

Form 1041, line 24 and 28 = 0 (total tax and tax due)

Form 1041, Sch B, line 1 = 2381 (adj total inc)

Form 1041, Sch B, line 6 = -2381 (CG as a negative)

Form 1041, Sch B, line 7 = 0 (DNI)

All Form 1041 K-1s, line 4a = 793 (beneficiary portion of CG)

Michigan

MI-1041, line 8 and 12 = 2381

MI-1041, line 13, 17 and 25 = 101 (tax)

[IRonMaN]

Go to schedule D on the federal return.  I believe somewhere near the bottom of the page there should be some boxes where you can allocate the capital gain to the beneficiaries.

[Sue928]

The federal return is flowing correctly. If I allocate the CG to the beneficiaries in Part III, Sch D, I'm telling the program to put the tax liability on the estate instead of the K-1s. I don't want to do that. The estate is closed. The tax due is the responsibility of the beneficiary. The tax liability belongs on the K-1. The federal return is correct. The Michigan return is the problem. How do I do the same as on the federal return - no tax for the estate, tax is the responsibility of the beneficiary so, the CG should be on the MI-1041 K-1.

[IRonMaN]

If you tell the program to allocate the capital gains to the beneficiaries, you are telling the program to allocate all of the income to the beneficiaries.  If so, that should take care of the MI problem.

[IRonMaN]

Also, do you have the return marked as final?

[Sue928]

The federal return is correct. The return is marked initial AND final. By marking it final, all reportable income, whether it is ordinary or capital, flows to the beneficiaries. There is no need for allocation on Sch D. 

What I cannot understand is why Michigan is not doing the same thing. What box am I missing to check on the Michigan side?