Software ’ s Shortcomings
a surprising result if the miscellaneous expense is a significant amount .
The trustee would be faced with an expense that reduces accounting income , trust on its federal income tax return , even for a simple trust or a complex trust that distributes all its income to beneficiaries .
Surprisingly , the IRS revised old accounting income calculation doesn ’ t change ; the same number for accounting income appears in Schedule B of Form 541 as appears on Schedule B of Form 1041 .
Tax credits , most commonly foreign taxes withheld on dividend income , can be passed through to beneficiaries on Schedule K-1 .
but does not reduce taxable income . Under the Uniform Principal and Income Act , miscellaneous expenses , along with other administrative costs , are allocated 50 percent to principal and 50 percent to income of the trust . The 50 percent of miscellaneous expenses that are no longer allowed at all as a deduction on form 1041 are still a reduction of accounting income which is used to limit the deduction for distribution to beneficiaries . This situation can result in ordinary taxable income for the existing regulations to draw a distinction between administrative expenses ( such as tax preparation and fiduciary fees ) and miscellaneous expenses such as investment advisory fees . This complicated how those fees are displayed on Schedule K-1 for a final return .
California , though , still has in effect the long-time rule that miscellaneous expenses can be deducted , after subtracting the 2 percent of AGI haircut . The fiduciary
But there could be miscellaneous expenses deducted on Form 541 that are not allowed on Form 1041 .
There are always some wrinkles to fiduciary tax return preparation to keep us alert .
William Downs , CPA is solo practitioner in Sherman Oaks . John Woodford , CPA is principal at his own firm . You can reach them at downscpa @ gmail . com and john @ abacus7 . com .
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