Paperwork and forms are part and parcel when it comes to filing taxes. There is the Form 1099 series, which reports various types of income and earnings. There is the Form 1040, which lists everything the IRS needs to know about income, losses, deductions, and other information.
Then there is the Form 1041, better known as the Schedule K-1, which is issued to beneficiaries that receive income from a trust or estate.
This form is part of the K-1 Form series; there are K-1 Forms for partnerships and S corporations as well as for estates. While these forms might look slightly different from one another, they all have the same purpose. Namely, they’re used to report income, losses, deductions, credits, and other distributions received.
When it comes to income from estates, trustees are responsible for issuing Schedule K-1 – “Beneficiary’s Share of Income, Deductions, Credits, etc.” to each beneficiary receiving $600 or more from the trust or estate. The trust also files Form 1041, containing that same information, to the IRS.
Beneficiaries then use the information from the Schedule K-1 to report the trust’s distributions. These distributions are considered “pass-through,” meaning the beneficiary is responsible for paying tax on income received.
While beneficiaries must report that income on Form 1040 as part of their personal income, the Schedule K-1 doesn’t need to be attached when filing. The only exception is if backup withholding was reported in box 13, code B on the form.
The challenge with the Schedule K-1 is that this form is sent out later than other tax information; it’s one of the last documents the taxpayer receives. The deadline for Schedule K-1 receipt is technically March 15, though some beneficiaries might not receive the form on that particular day.
This can make preparing and filing federal taxes by the April 15 date somewhat challenging, especially if multiple trusts are involved. But failure to file taxes on time (or to report income from a trust) can result in penalties, even in the face of Schedule K-1 delays. This is why some experts recommend filing tax return extensions.
As with anything involving federal or state tax filing, it’s a good idea to consult with a tax advisor to determine the best way to report earnings received from a trust.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice, meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.