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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10104
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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You did not answer the question concerning allocation of

Customer Question

You did not answer the question concerning allocation of pass through final year's deductions.
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Yes, I did.

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Capital losses and income are two different things.

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You, as the only beneficiary, if this IS the final year will be allocated both.

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The income will retain it's character and the CAPITAL losses with retain their character

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One does not affect the other, with the exception of the 3000 limit and carryover.

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ordinary income (earned, dividend, interest) can be offset by ordinary losses

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capital gains can be offset by CAPITAL losses ... AND 3k of capital loss can be used against ordinary income

Expert:  Lane replied 1 year ago.

Now, you MAY be about accounting income which WOULD (with an income trust) allos capital fgain to be added to corpus to be distributed as income (DEPENDING on the terms of the trust and state law)

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Accounting income is used to determine the amount that is required to be distributed to the income beneficiary. Taxable income allocated to a beneficiary is determined by the income distribution deduction. Accounting income affects taxable income to the extent that it is a limitation in the calculation of the income distribution deduction .

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Accounting income refers to trust income that is allocated to the income beneficiary and not to the remainder beneficiary. For example, a capital gain is generally added to the principal for the benefit of the remainder beneficiary.

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And again, a trust's accounting income can be defined by the trust agreement, and if it is not, it is determined by state law

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But for capital LOSSES, as you've described (and this only applies to the FINAL 1041 , in terms of the ability to pass out to bene's) ... if losses exceed gains, all losses are allocated to the trust. Capital losses can be deducted against ordinary income again, (lesser of net loss or $3,000). Excess capital losses may be carried forward indefinitely. Unused capital loss carryovers can be passed through to the beneficiary at the termination of the trust. ( and again, retain their character).

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Customer: replied 1 year ago.
This was an income trust to my mother from my father. I am the beneficiary. After she passed away, the trust continued to receive dividends. Since this is an income trust, I believe that those dividends that came in during her liftime go on her K-1 and her final 1040. The dividends that came in after her passing go to me on a K-1. There were many stock trades while she was alive. No stock trades after she died. The capitol losses arose while she was alive. The question is whether those capital losses are 100% hers or are they split between her and I based on the allocation of dividend income.
Customer: replied 1 year ago.
This will be the final 1041.
Expert:  Lane replied 1 year ago.

If losses exceed gains, all losses are allocated to the trust. Capital losses can be deducted against ordinary income as I described above...

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There is no special allocation .., but because this is the final year, as I've mentioned, those accumulated losses can now be passed out on the final K-1 to you. (But not allocated against ORDINARY income for you, -in excess of 3000 per year - just as it could not have been for the trust during years before the final K-1)