If you received a Schedule K-1 tax form it may be because you are a beneficiary of a trust or estate (although there are other reasons to receive one). Like individuals and entities, some trusts and estates are required to file an income tax return for revenue they generate annually. Trusts and estates are responsible for paying taxes on income received annually if the trust/estate keeps the funds. If the income does not remain with the trust/estate but is instead distributed to a beneficiary, then the tax obligation also passes through to the beneficiary. Often, a trust will distribute income generated directly to its beneficiaries according to the terms of the trust. Estates typically make distributions when administration of the estate is complete. In these scenarios, trust beneficiaries may receive K-1s in the years they receive distributions, whereas estate beneficiaries will likely receive one K-1.
The Schedule K-1 reports the beneficiary’s gross income received from the trust or estate. In general, trusts and estates pay more in taxes than individual beneficiaries do due to compressed tax brackets for these entities. Therefore, passing the income through the entity via the Schedule K-1 is usually in the best interest of both the trust/estate and its beneficiaries. It is the beneficiary’s responsibility to report and pay taxes on this income on their personal income tax return by providing the Schedule K-1 to their tax professional for inclusion on their tax return.
Income normally refers to ordinary income, i.e. revenue that occurs throughout the year, such as (but not limited to) dividends and interest. Capital gains are normally treated as a principal transaction for trusts – that is to say, they are typically not included on the Schedule K-1 as reportable income. However, in the final year of either a trust or an estate, since all funds have been distributed out to the beneficiaries, all taxation and deductions also get passed through to the beneficiaries via the Schedule K-1.
It is important to understand that, for example, if you received a distribution of $15,000 from a trust, it might represent $15,000 of income or it could represent a mixture of income and a return of principal. The Schedule K-1 will only reflect the taxable income passed through; it will not show the distribution amount of $15,000 unless that is entirely income. This is often confusing to beneficiaries. If you receive a specific devise from an estate (e.g. a will specifically leaves you a gift of $10,000), that is typically a principal distribution and will not generate a Schedule K-1.
Beneficiaries are required to submit a copy of their Schedule K-1 with their personal tax return. If you received the form, it is important that you keep the K-1 in your records and provide a copy to your tax professional. The K-1 is only generated after the trust or estate has filed its own tax return (Form 1041). This means that K-1s are not generated at the same time as other 1099 forms that beneficiaries will receive. You can usually expect to receive your K-1 by March 15th. It is important to wait to file your individual tax return until you have received your K-1 or you have confirmed with the fiduciary that you will not be presented with one.
If you need additional information or clarification regarding the Schedule K-1, or need professional advice regarding your own form, you should consult your tax professional. The fiduciary can tell you why the form was generated but not what its implications are for your personal tax situation.
Rev 6/26
The information presented on this website is general in nature and not intended to be legal advice. No attorney-client relationship will exist with JKS, LLC unless agreed to in writing. Please contact us to discuss your particular situation.
