A schedule K-1 is a commonly used Internal Revenue Service (IRS) tax form issued toindividuals who have a beneficial interest in certain types of entities. If you’re the beneficiary ofa trust or you have a trust as part of your estate plan, it’s important to understand your taxliability, including when you’re likely to receive a K-1 Trust Distribution Form and what to dowith it. This simple guide covers the basics you need to know.
Trust Distribution Basics
When a trust distributes funds to a beneficiary, the distribution is categorized as either income or return of principal. Under IRS rules, principal distributions are not taxable, as it’s assumed that this money has already been taxed once before it was placed into the trust. However, any income or interest the money earns after it’s inside the trust is considered taxable income.
If the trust holds the income and does not distribute it before the end of the year, the trust is responsible for paying the taxes. However, if the income has been distributed, it is taxable to the beneficiary who receives it. Distributions are assumed to be made up of current-year income first, then any remaining amount is attributed to the principal balance.
Reporting Taxable Trust Distributions
When a trust distributes income to one or more beneficiaries, the trust takes a deduction using Form 1041. It then issues a K-1 Trust Distribution Form to each beneficiary. This form shows the amount that was distributed and how much was attributed to income versus principal. The K1 Form also reports any deductions or credits. With this information, a trust beneficiary will be able to figure out their tax liability for the year.
Individuals who receive a K-1 Trust Distribution Form must include the amounts reported on their personal income tax return. Failing to do so will typically result in penalties, which can sometimes be quite steep. If you’re working with a tax professional, it’s important to provide a copy of this form to ensure your taxes are filed correctly.
Other Types of K-1 Forms
While we’ve just covered the basics of a K-1 Trust Distribution Form, it’s important to note that there are other types of K-1 Forms. Schedule K-1 Form 1065 and Schedule K-1 Form 1120S are used to report income earned by other types of “pass-through entities.” These organizations shift tax liability from the entity itself to the individuals who hold an interest in them.
You’re likely to receive these types of K-1 forms if you are an S-corporation shareholder, business partner, limited partnership investor, and/or an investor in certain exchange-traded funds (ETFs).
The Bottom Line
If you’re the beneficiary of a trust or estate or are involved with any of the entity types mentioned above, you should be on the lookout for a K-1 each year. If you receive this form, either you or your tax preparer will need to include the information on your individual income tax return.
Generally, you should expect to receive your K-1 Forms on or around March 15th. Unless the form includes backup withholding in box 13 (code B), you won’t need to file it with your tax return. However, you’ll want to keep all K-1 Forms for your records.
Even if you’ve filed your own taxes for years, receiving a K-1 form can complicate matters. Before attempting to report this income on your tax return, it’s a good idea to consult with a tax professional. The experts at Gurian CPA are here to help. Reach out to us today to schedule a consultation.
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FAQs
Schedule K-1 is a tax document that you might receive if you are the beneficiary of a trust or estate. This document reports a beneficiary's share of income, deductions and credits from the trust or estate.
What is a K1 in a trust distribution? ›
Schedule K-1 is a tax document that you might receive if you are the beneficiary of a trust or estate. This document reports a beneficiary's share of income, deductions and credits from the trust or estate.
Do beneficiaries pay tax on K1? ›
You are subject to tax on your share of the estate's or trust's income, and you must include your share on your individual tax return. Schedule K-1 (541), column (b) shows amounts from your federal Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, etc.
Do you pay taxes on K-1 distributions? ›
Are K-1 distributions taxable? Sometimes the distribution reported on a K-1 is taxable to the recipient, but that determination depends on the type of distribution. For example, if the distribution is a return of capital, it is not taxable. However, if the distribution is income from the business, it is taxable.
What is a K-1 form for inheritance? ›
Use Schedule K-1 to report a beneficiary's share of the estate's or trust's income, credits, deductions, etc., on your Form 1040 or 1040-SR. Keep it for your records. Don't file it with your tax return, unless backup withholding was reported in box 13, code B.
Do beneficiaries pay taxes on trust distributions? ›
Beneficiaries of a trust typically pay taxes on distributions they receive from the trust's income. However, they are not subject to taxes on distributions from the trust's principal.
Who prepares a K1 for a trust? ›
Schedule K-1 (Form 1041) is an official IRS form that's used to report a beneficiary's share of income, deductions and credits from an estate or trust. Its full name is “U.S. Income Tax Return from Estates and Trusts” The estate or trust is responsible for filing Schedule K-1 for each listed beneficiary with the IRS.
Does K1 count as income? ›
As far as K-1 distributions are concerned, they are generally not considered taxable income.
Do distributions show up on K-1? ›
Schedule K-1 doesn't show actual dividend distributions the corporation made to you. The corporation must report such amounts totaling $10 or more for the calendar year on Form 1099-DIV, Dividends and Distributions.
Do I need to report K1 to the IRS? ›
Purpose of Schedule K-1
Keep it for your records. Don't file it with your tax return unless you're specifically required to do so. (See Code O under Box 15, later.) The partnership files a copy of Schedule K-1 (Form 1065) with the IRS.
However, all K-1s provide detailed information. They show the type of income, tax deduction, or loss. This lets you accurately report it on your tax return. With TurboTax Live Business, get unlimited expert help while you do your taxes, or let a tax expert file completely for you, start to finish.
Why am I getting a k1 form? ›
A Schedule K-1 is issued to taxpayers who have invested in limited partnerships (LPs) and some exchange-traded funds (ETFs). There are also K-1 forms for shareholders in S corporations and beneficiaries of estates or trusts.
What is a k1 tax form for dummies? ›
The K-1 tax form: a clear explanation
What is the K-1 tax form? A K-1 tax form is used to report the earnings, losses, and dividends you make by participating in some type of private investment, usually a Limited Partnership (LLP), Limited Liability Corporation (LLC) or a small percentage of ETFs.
Do you get a k1 from an irrevocable trust? ›
It's important to note that while the income on the trust is taxable, the principal is not. Each beneficiary will receive a Schedule K-1, which will detail the amount paid, as well as the income and losses on the trust. They'll report the income on their Form 1040, Schedule E, Part III.
Does a charitable beneficiary receive a K-1 from a trust? ›
Beneficiaries of charitable remainder trusts must report on their personal income tax returns payments received from the trust reflected on Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions and Credits.
How do I report distributions on k1? ›
Form 1120-S - Withdrawal to Shareholders. Each shareholder's distribution amount for the corporation's fiscal year should be reported on Schedule K-1 (Form 1120-S) Shareholder's Share of Income, Deductions, Credits, etc., Line 16, with "D" as the reference code.
Is K-1 income considered earned income? ›
Ordinary income reported to an individual shareholder on Schedule K-1 from an S corporation is not considered self-employment income. Such income is investment income. It is thus not subject to self-employment tax, nor is it included in the calculation of earned income for the credits that are based on earned income.
