Election to Treat Certain Payments of Estimated Tax as Paid by the Beneficiary
A trustee may elect to treat any portion of a payment of estimated tax made by a trust as a payment made by a beneficiary of the trust. This election may also made by the executor of an estate in a tax year. It is reasonably expected to be the last tax year of the estate. This election must made on or before the 65th day after the close of the taxable year of the trust.
The election made by filing Form 1041-T (Allocation of Estimated Tax Payments to Beneficiaries). The related fiduciary income tax return (Form 1041) can filed with Form 1041-T. If it is ready to filed by March 6, 2020. It can filed by its actual (April 15, 2020) or extended due date (September 15, 2020) assuming that the trust is a calendar year trust. If the related Form 1041 is not ready to filed on or before March 6, 2020. Form 1041-T should filed separately with the Internal Revenue Service Center where Form 1041 will be filed.
The amount elected treated as distributed to the beneficiary on the last day of the prior taxable year. (i.e., December 31, 2019 for amounts elected by March 6, 2020). It paid by the beneficiary as an estimated payment on January 15 of the following year. (i.e., January 15, 2020 for amounts elected by March 6, 2020).
Example:
A trust made estimated tax payments during the first three quarters of a tax year. The trust’s fiduciary realized that a beneficiary attained a certain age which triggered a mandatory distribution. This mandatory distribution caused the trust’s taxable income to be distributed to the beneficiary. Consequently, the trust expected to owe little or no tax, but the beneficiary would owe additional tax as a result of the distribution. By making the election described above, the trust’s estimated tax payments could treate as made by the beneficiary.
Election to Treat Distributions as Made in Prior Tax Year
A fiduciary of a trust or estate can elect to treat all or any part of a distribution made within 65 days after the end of a tax as made in the previous tax year. The 65 day deadline applicable to the 2019 tax year is Thursday, March 6, 2020. As an example, if a distribution made on or before March 6, 2020, the fiduciary can elect to treat any or all of the distribution as made in the 2019 tax year.
In order to make an informed decision with respect to whether or not to make this election. The fiduciary should compute the trust’s 2019 fiduciary accounting income, distributable net income and taxable income. The fiduciary should then determine the impact of additional distributions on these three amounts. And how the additional distribution would impact the tax situation of the beneficiary.
Example:
The fiduciary determines that the trust has taxable income subject to the 39.6% tax bracket. After computing the trust’s distributable net income and fiduciary accounting income. The fiduciary also knows that the beneficiary of the trust is currently subject to the 15% tax bracket. Consequently, the fiduciary determines that it would be beneficial to distribute additional funds from the trust. To the beneficiary prior to March 6, 2020 and elect to treat these distributions as made in 2019. In order to shift income taxed in the 39.6% tax bracket to income taxed in the 15% tax bracket.
As part of this analysis, the fiduciary has also considered the 3.8% Additional Medicare Tax which is new for 2019 as well as non-tax factors such as the financial acumen of the beneficiary and the grantor’s desire to distribute additional funds to the beneficiary. Flex Tax and Consulting Group happily to help you all tax services here. If you have any question, please don’t hesitate to contact with us.
