Discussion:Trust with only tax-exempt income required to file?
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Discussion Forum Index --> Basic Tax Questions --> Trust with only tax-exempt income required to file?
Discussion Forum Index --> Tax Questions --> Trust with only tax-exempt income required to file?
| 15 October 2009 | |
| I know the income limit for filing requirements on a trust is $600, but does this include tax exempt income? I have a client who has a trust with $2000 tax exempt interest and no other income or deductions. Is she required to file? | |
| 15 October 2009 | |
| Are there distributions of that tax exempt income that need to be reported on K-1 forms? | |
| October 15, 2009 | |
| Not if there's no requirement to file a return, which there isn't if there is no taxable income and less than $600 of gross income. | |
| 15 October 2009 | |
| Yes...distributions do need to be reported. I will instruct my client that a return does need to be filed. For clarification purposes, though, is tax exempt income excluded from 'gross income' when using the $600 test? | |
| 15 October 2009 | |
| I couldn't find a clear answer to whether tax exempt income was included in gross income but I suspect it is not.
However, I was concerned the beneficiaries needed to know their share of tax exempt income to put on their own 1040's. The brokers now have to issue 1099 forms for that. I suppose you could have sent them letters to explain not filing and here is your number. Better yet send them a K-1 form that you didn't actually file with a 1041. They know what to do with a K-1 - hand to the tax preparer! | |
| 15 October 2009 | |
| Yes , it over the limit even though it's exempt. The bene needs the tax exempt amt to report on the 1040. Tax exempt income is reportable. | |
| 15 October 2009 | |
| Thanks for the prompt responses. I will advise accordingly. | |
| October 16, 2009 | |
| I'm not getting where this requirement would come from. Sec. 6033 requires an income tax return to be filed with respect to a trust if it has taxable income, $600 of gross income, or a nonresident alien beneficiary. Sec. 641 says to compute a trust's income in the same manner as an individual's, with enumerated exceptions, none of which seem relevant here. Sec. 103(b) says that gross income does not include interest on municipal bonds. Hence, if that's what these bonds are, then the trust has no gross income and no taxable income, and so is not required to file a return if it doesn't have a nonresident alien beneficiary. | |
| 17 October 2009 | |
| dumb discussion. The requirement to file a K-1 is separate from the requirement to file a return. You guys want to file a k-1 without the 1041 have fun...♫ | |
| October 17, 2009 | |
| OK then: where does the requirement to file a K-1 come from? | |
| 17 October 2009 | |
| You could look at the instructions. Given the fact that the beneficiary has to report the distributable income, telling him/her what it is comes under the heading of fiduciary responsibility governed by all sorts of state laws. Unless of course, you believe that if a 1041 is not required to file the distributable income is not taxable...♫ | |
| October 17, 2009 | |
| I did look at the instructions. They have no hint whatsoever that a trust not required to file a return is required to file a schedule on the return. If they did, it would be contrary to the statute and regulations, unless there's another requirement I'm not seeing.
If state law requires the fiduciary to help the beneficiary file his return, then so be it, but I haven't seen such a law. State law certainly won't require a fiduciary to tell the IRS anything. Whether a payer is required to tell the payee about a payment has very little to do with the payee's tax liability. | |
| 17 October 2009 | |
| Difference in interpretation, I guess. I agree that State law does not require telling the IRS, however failure to inform the beneficiaries would involve liability that transfers to the accountant that provided the advice...♫ You could always write them letters and provide them with the information that would have been on the K-1 if you did do the return. | |
| 19 October 2009 | |
| The trustee has a fiduciary responsibility to the beneficaries of the trust. You must have due diligence to give them the correct information in order for them to file a correct 1040.
Non-taxable income is still reportable income on the 1040. Therefore, if there was a distribution of the non taxable income to them, they must have a K-1 from the trust. In order to give them a K-1, a 1041 must be filed. The K-1 is a part of the 1041. If no income was distributed, and taxable income was below the threshhold, I guess that no 1041 would be required. It has been my experience, however, that it is better to file a return with -0- income, than to skip a year and be told 10 years down the road that a tax return is missing and no one will remember why. The statue of limitations does not begin until a tax return is filed. | |
| October 19, 2009 | |
| Just because I have to report something on my return doesn't mean that anybody else has to tell the IRS about it.
The trustee has a fiduciary duty to hold and manage trust property for the benefit of the beneficiary in accordance with the terms of the trust. I don't know that the trustee has any duty to help the beneficiary get his tax return right. Even if he does, he certainly does not have to file a tax return with the IRS when the statute, the regulations and the instructions to the form all tell him not to. Ordinary interest is reportable by payees. Under some circumstances, payers have to give payees Forms 1099. Under other circumstances they don't, even if they have fiduciary duties to them. Starting a statute of limitations is a valid concern, if there is any risk that there should have been any taxable income reported. But that is not a real risk for a trust that just holds some bonds, and is not likely to justify the cost and effort of filing a return and the risks from bringing attention to the trust. | |
| 20 October 2009 | |
| The responsibility to inform the beneficiary is clear. Sending a K-1 is the easiest way to do it. Preparing a 1041 is the easiest way to produce a K-1. If you prepare the 1041 and instruct client not to file that's your business. Again...dumb discussion.
As an aside -- what it actually says in the 1041 instructions: Use Schedule K-1 (Form 1041) to report the beneficiary’s share of income, deductions, and credits from a trust or a decedent’s estate. The fiduciary (or one of the joint fiduciaries) must file Schedule K-1. A copy of each beneficiary’s Schedule K-1 is attached to the Form 1041 filed with the IRS, and each beneficiary is given a copy of his or her respective Schedule K-1. | |
| October 20, 2009 | |
| That's the instructions on a schedule which is part of a form which tells you not to file it. You can't seriously believe that they're telling you to file a Schedule K-1 when they tell you not to file the form it's a part of.
Do you think you have to file Schedules K-1 for a foreign trust with no U.S. beneficiaries? There's a fiduciary. It's only by reading the 1041 instructions that you would find out you don't. | |
| 20 October 2009 | |
| I get proforma copies of K-1 forms every year from the Cayman offshore stuff. They put a label at the top to inform you it will not be filed with IRS and is simply being provided to give tax information to the interest owners. | |
| 20 October 2009 | |
| As I said, Larry, difference in interpretation. (Although you seem to have changed your opinion from "no hint" to denial of the possibility that a contradiction may exist.) You are free to tell your clients whatever you want. My point is only that preparing a 1041 is the easiest way to comply with state law on fiduciary responsibility, which is why the discussion is dumb. | |
