Common questions about Form 1041 distributions to beneficiaries in ProSeries

Follow these steps to create a Schedule K-1 for a beneficiary:

1. Press F6 on your keyboard to open the Open Forms window.
2. Type K and click OK to open the Schedule K-1.
3. Enter the beneficiary's name and click Create.
4. Fill out Part II Information About the Beneficiary.
5. Scroll down to the Beneficiary's Allocation Smart Worksheet.
6. Enter the beneficiary's dollar amount on line A or their percentage for the allocation on line B.
   • Don't enter both dollar amounts and percentages.
7. Select the button next to QuickZoom here to go to another copy of Schedule K-1.
8. Repeat steps 4-6 for each beneficiary.

When working with a simple trust, the the distributable net income (DNI) is automatically distributed to the beneficiaries. When working with other trust types, including complex trusts, you must enter the amount of the DNI that you want passed through to the beneficiaries.

Follow these steps to allocate DNI to the beneficiaries:

1. Open the tax return.
2. Open Form 1041.
3. Scroll down to Schedule B Income Distribution Deduction on page 2.
4. Review the line C of the Trust Accounting Income Smart Worksheet to determine how much can be allocated to the beneficiary.
5. Enter the amount you want to be distributed on line 9.

Capital gains aren't automatically distributed to the beneficiaries when working in Form 1041. However, you can choose to have them distributed. Gains or losses from the complete or partial disposition of a rental, rental real estate, or trade or business activity that is a passive activity must be shown as an attachment to Schedule K-1.

Follow these steps to distribute capital gains to beneficiaries:

1. Open the Schedule D.
2. Scroll down to Part III Summary of Parts I and II.
3. Enter the amount of capital gains to be allocated to the beneficiary in (1) Beneficiaries' column.

Box 3 - Net short-term capital gain

• If there's a capital loss carryover for the final year of the estate or trust, don't enter the loss on line 3.
  • Enter the beneficiary's share of short-term capital loss carryover in line 11, code B.
  • If the beneficiary is a corporation (final year), enter the beneficiary's share of all short- and long-term capital loss carryovers as a single item in line 11, code B, .
• See Section 642(h) and related regulations for more information.

Boxes 4a through 4c - Net long-term capital gain

• If there is a capital loss carryover for the final year of the estate or trust, do not enter the loss in lines 4a - 4c.
  • Enter the beneficiary's share of the long-term capital loss carryover in line 11, code C.
  • If the beneficiary is a corporation (final year), enter the beneficiary's share of all short and long-term capital loss carryovers as a single item in line 11, code B.
• See Section 642(h) and related regulations for more information.

Estates and trusts use the deductions on Form 1041, page 1 to arrive at the net income amounts to report on the Schedule K-1. However, these deductions are allocated to each class of income:

• Interest
• Non-Qualified Dividends
• Non-Passive Income
• Passive Income
• Short-Term Capital Gains
• Long-Term Capital Gains
• Qualified Dividends

The allocation of deductions can been seen on the Distributable Income for Schedule(s) K-1 worksheet.

Follow these steps to open the Distributable Income for Schedule(s) K-1 worksheet:

1. Press F6 on your keyboard to bring up Open Forms.
2. Type in "DIST" and press Enter to open the Distributable Income for Schedule(s) K-1 worksheet.
3. Scroll down to Part II - Allocation of Deductions to Income.

Additional information:

• Income entered on Form 1041, page 1 flows to Line 1 in Part II for each class of income.
• Deductions entered on page 1 of Form 1041 flow to Lines 2 - 9 in Part II and are allocated on a pro-rata basis between:
  • Column A (interest),
  • Column B (non-qualified dividends),
  • Column E (non-passive income) and
  • Column F (passive income).
• The deductions are totaled on Line 10 for each column. If the total deductions are greater than the amount of income for that column, the excess deduction amount flows to Line 12 of that column.  Excess deductions are first applied to Column A, B, E, and F.
• If the total deductions on the return are greater than the net income reported in Columns A, B, E and F the excess deductions will be allocated first to Column D (short-term gains), then Column D (long-term gains), and then to Column C (qualified dividends).

To allocate the deductions between all classes of income:

• Mark the checkbox labeled Check to allocate deductions pro-rata to all classes at the top of Part II of the Distributable Income for Schedule(s) K-1 worksheet.