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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29569
Experience:  Taxes, Immigration, Labor Relations
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Lev, My name is ***** ***** and I need a little clarification

Customer Question

Hi Lev, My name is ***** ***** and I need a little clarification on one of your posts on where to report medical expense distributions on beneficiary's K-1 that came out of the principal, not trust income. Using your response below, I don't understand where you said to put the amount paid on beneficary's behalf from principal in box H with an explanation. Box H seems to refer to something about net investment income tax. Did you mean to enter it in box I instead and just state that the amount was distributed out of principal and is not taxable to the beneficiary?On Schedule B, line 10 of Form 1041 you would report distribution that may be deducted from taxable income - as medical expenses are not deductible for the trust - you should not report that amount. You will report only distributed income - that is $300; The same amount will be reported on the K-1. Other distribution was not from income but from trust assets - that are not reported on the trust income tax return nor may reduce tax liability.But you may report that information in the box 14 with the code H and may add a separate sheet with details - so beneficiary would know the source and type of distribution. for instance - in your situation - medical expenses may be deductible for beneficiary.
JA: Thanks. Can you give me any more details about your issue?
Customer: i'll use easy numbers to simplify. I'm trustee of a complex trust (special Needs) and trust made $300 income. I paid $12000.00 medical bills for beneficiary with trust checks. On k-1, i'll make a $11,700 distribution from the principal and $300 from trust income
JA: OK got it. Last thing — Tax Professionals generally expect a deposit of about $32 to help with your type of question (you only pay if satisfied). Now I'm going to take you to a page to place a secure deposit with JustAnswer. Don't worry, this chat is saved. After that, we will finish helping you.
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.
Medical expenses may be deducted ONLY by a physical person.The trust itself may not deduct medical expenses.So if trust simply pays medical expenses for the beneficiary - that is NOT deductible.If the trust pays medical expenses for the beneficiary out of funds that are distributed to the beneficiary - these are considers as constructively paid by the beneficiary - and the beneficiary may deduct such payments.
Customer: replied 1 year ago.
I do understand that part. I'm going to make a distribution to the beneficiary to cover the amount of trust income (say $300) so the trust won't be taxed (the beneficiary will a the lower tax rate), but the trust wrote checks from the trust checking account for $12,000 for beneficiary's medical expenses. I thought I needed to show somewhere on the beneficiary's K-1 that the trust is distributing the $300 of trust income and $11,700 from trust principal and that the principal shouldn't be taxed again. In reading a previous response to someone else on this same issue, you wrote..."On Schedule B, line 10 of Form 1041 you would report distribution that may be deducted from taxable income - as medical expenses are not deductible for the trust - you should not report that amount. You will report only distributed income - that is $300; The same amount will be reported on the K-1. Other distribution was not from income but from trust assets - that are not reported on the trust income tax return nor may reduce tax liability.But you may report that information in the box 14 with the code H and may add a separate sheet with details - so beneficiary would know the source and type of distribution. for instance - in your situation - medical expenses may be deductible for beneficiary." My question is this........I don't understand in that response where you said to put the amount paid on beneficary's behalf from principal in box H with an explanation. To me, Box H seems to refer to something about net investment income tax? Did you mean to enter it in box I instead and just state that the amount was distributed out of principal and is not taxable to the beneficiary?
Expert:  Lev replied 1 year ago.
but the trust wrote checks from the trust checking account for $12,000 for beneficiary's medical expenses. I thought I needed to show somewhere on the beneficiary's K-1 that the trust is distributing the $300 of trust income and $11,700 from trust principal and that the principal shouldn't be taxed again.
Expert:  Lev replied 1 year ago.
The purposes of K1 statement is to report TAXABLE distributions and some other items that are used in tax calculations or may affect taxable income.The distribution of corpus is NOT reported on K1.There is no such requirement.The distribution of corpus may be reported on separate attached note.. .I appreciate if you take a moment to rate the answer.Experts are ONLY credited when answers are rated positively.If you still have any doubts, need clarification - please be sure to ask.I am here to help you with all tax related issues.