Hi and welcome to Just Answer!
Should deductions be allocated to accounting income or corpus.
Deductible expenses are attributable to taxable income first and if anything left - these expenses are covered from corpus.
There are 3 beneficiaries (equal shares) - 2 individuals, one non-profit. I would like to make this the initial and final return. Is this possible?
Yes - that is possible. You need to have complete distribution of all assets and on the form 1041 - in the header - both boxes should be checked "Initial return" and "Final return"
Correspondingly - on the form K-1 - check the box "Final K-1"
Do I have to allocate the excess deductions to the beneficiaries and do they get a tax benefit out of this?You may allocate the excess deductions to the beneficiaries - will or will not they be able to use any passed through deductions - depends on their individual circumstances.
Excess deductions for the final year are generally reported by beneficiaries on schedule A, line 23.
Let me know if you need any help.
Be sure to ask if any clarification needed.
Thank you Lev. How about the the second half of the question?
Sorry I overlooked these items...
I assume the above two items have no tax implications.
You are correct.
Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price. This is true even if the proceeds were paid under an accident or health insurance policy or an endowment contract.
As a recipient of inheritance - either the estate or the beneficiary - does not need to claim it as income. Regardless of the value. Please see for reference IRS publication 525 page 33 - http://www.irs.gov/pub/irs-pdf/p525.pdf
Does the $48K and $12K have to be reported somewhere on return even though it is not income?
No need to report these items on the income tax return. But you may mention these amounts in comments on K-1.
Does the non-profit get mentioned even though only what I assume is corpus will be distributed to it?
As - there are neither income nor deduction items - no need to mention on the income tax return.
Sorry for confusion.
Your information helped me immensely. Last thoughts to make sure I understood correctly:
1) Should my comments on the K-1 say beneficiary will receive $20k [($48K bank accounts + 12K life insurance) * .333]?
2) Should I include this distribution from corpus on line 10, sch B, form 1041?
3)Is it okay to mark the return ending 11/30/2011 final even though the corpus has not yet be distributed? Note, that it will be distributed shortly and no income existed after 11/30/2011 and none ever will
You may but are not required to mention that information on K-1.
Some administrators provide additional letter that is not sent to the IRS with detailed distribution info.
Form 1041 is to report items related to income taxes - those related to income and deductions. No need to mention the distribution from corpus on schedule B.
3)Is it okay to mark the return ending 11/30/2011 final even though the corpus has not yet be distributed?
You may do that if you do not expect any following income tax returns for the trust. However that is not a good practice - because you may not use EIN of the trust after 11/30/2011. For instance - all trust's bank accounts should be closed as EIN would not be valid after that date.
As a general practice - the Final tax return is filed after all trust's assets are distributed and the trust is terminated.
Let me know if you need any help.
Your insights have been fabulous.
To wrap this up finally, will it be ok to file the final return (11/30/2012) with zero income? All that's going to be done from now until 11/30/2012 is to liquidate the bank accounts and give 1/3 each to 2 individuals and one charity.
Yes - you may file the income tax return with zero income and mark it as a final tax return - assuming there is no income in reporting period.