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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 11813
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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How do you calculate Accounting income complex trust? Line 8 of Schedule ? Capital

Customer Question

How do you calculate Accounting income for a complex trust? Line 8 of Schedule B?
Capital gains are deducted, net tax exempt interest is added, what about tax refunds? What is the purpose of this calculation? Is it a cumulative calculation?
Dividends of $4376, Capital Gains of $7383, loss of ($21) tax refund of $395, tax exempt income of $950, taxes paid $2250.
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.
Hi,... not sure I understand your question..You asked you question and then nsswered it..Essenially "Trust accounting income is the income and expense items that are used to determine the amount that certain beneficiaries will receive from the trust each year. Generally speaking, it is all revenue minus all expenses paid."
Expert:  Lane replied 1 year ago.
So just do the math... and if it's a positive number, that's your number, and if it's a loss, put the word "loss" on line 8 & complete schedule K-1 based on the instructions.
Customer: replied 1 year ago.
OK, obviously I do understand this concept. The difficulty I am having in reviewing past filed 1041's for this particular client is that the Accounting income reported on is not holding to this calculation and I am trying to figure out why.
The Trust document does not specify how to calculate accounting income; IRC does not cover this; and I am not finding the section in UPIA in NJ.
Expert:  Lane replied 1 year ago.
First, it's iimportant to define some terms: "Accounting Income" is nothing speccific to trusts..Acounting income is a term that is seen most in managerment accounting, as it's best used to quantify organizational performance; Accounting income or loss recognizes realized gains and losses, and does not recognize unrealized gains and losses. Economic income or loss recognizes all gains and losses, whether realized or unrealized..So TRUST account income is referring to calculating REALIZED gains and losses from a trust. That's all..First, just to be sure we're on the same page about simple vs. complex trusts. ..., .A simple trust is one that is required to DISTRIBUTE ALL OF ITS INCOME and no amount is paid or set aside for CHARITABLE CONTRIBUTONS. Otherwise, the trust is a complex trust. And here's where state law comes to play .. Capital Gains under most state laws and trust documents, are allocated to corpus..So although you're goin down one of the right roads in looking to state trust law, the WIDE discretion given to the trustee to maximize for beneficiaries, as part of his/her fiduciary duties WITHIN the TERMS of THE TRUST (the MOST important element/constraint regarding how decisions about distributions are made) will be the bigggest driver of what you see on the K-1..Trustees, for example, (although not applicable here, as NJ has not adopet either RUPIA '62 OR '97) because of statutory principal or income provisions by prescribing specific accounting and income allocation methods in a state, means a trustee can follow prior law even in states that have adopted UPIA-97. .I only make this point to point out that it's the interplay between (1) State law (2) specific discretion given to trustee (3) discretion arising out of the duty to maximize for beneficiaries when not SPECICIFICALLY prohibited, and (4) the BASIC starting point that in a complex trust capital gain is allocated to corpus and not distributed (although again, in certain circumstances CAN be) ... that determins the answer you're looking for..Without providing the trust document, applying statute law, and asking the trustee what he/she was doing, your question can't be answered. You're asking for a definitive answe that can't be provided without MUCH more information.