This article focuses solely on the entry of the Income items which are found in Box 1 and Box 8 of the Schedule K-1 (Form 1041) for a Beneficiary Filing Form 1040. To enter a K-1 (Form 1041) in the tax program from the Main Menu of the Tax Return (Form 1040) select:
- Income Menu
- Rents, Royalties, Entities (Sch E, K-1, 4835, 8582)
- K-1 Input - Select 'New' and double-click on Form 1041 K-1 Estate/Trust which will take you to the K-1 Heading Information Entry menu. All information in this menu must be entered to continue. At the bottom of this screen, the user must select if the K-1 is from an Estate or a Trust.
- After entering all required information, select ‘OK’ and the K-1 1041 Edit Screen will appear. This K-1 1041 Edit Screen has two distinct sections entitled ‘Heading Information’ and ‘Income, Deductions, Credits, and Other Items.
Set forth below is basic information on each line of the Income section of the Schedule K-1 1041 Edit Menu. For additional information regarding the requirements for Schedule K-1 (Form 1041) see: Instructions for Schedule K-1 (Form 1041) for a Beneficiary Filling Form 1040.
This section of the Schedule K-1 (Form 1041) is for income items and it does not usually contain losses. Except in the final year of an Estate or Trust's operation, the Internal Revenue Code does not normally allow losses, whether incurred in the current tax year or accumulated to be distributed to a beneficiary. Furthermore, any losses reported in boxes 6 through 8 may be subject to the passive loss limitations of section 469, which generally limits deducting passive losses only from passive activities. At this time, the IRS has stated that it has not yet issued the rules for applying these limitations to beneficiaries. see: Instructions for Schedule K-1 (Form 1041) for a Beneficiary Filling Form 1040
Line 1 – Interest - Amounts reported in Box 1 are not considered passive income. Amounts entered on this line will automatically flow to Line 2b of Form 1040 as Ordinary Interest. No Tax Exempt Income is reported on the Schedule K-1 (Form 1041), and any such income is reported on the tax return of Estate or Trust that has issued this K-1 to the beneficiary/taxpayer.
Line 2a –Ordinary Dividends - Amounts reported in Box 2a are not considered passive income. Amounts entered on this line will automatically flow to Line 3b of Form 1040 as Ordinary Dividends.
Line 2b–Qualified Dividends– Amounts reported in Box 2b are not considered passive income. Amounts entered on this line will automatically flow to Line 3a of Form 1040 as Qualified Dividends.
Line 3 –Net short-term capital gain - Amounts reported in Box 3 are not considered passive income. Amounts entered on this line will automatically flow to Schedule D (Form 1040), Line 5.
Line 4a– Net long-term capital gain – Amounts reported in Box 4a are not considered passive income. Amounts entered on this line will automatically flow to Schedule D (Form 1040), Line 12.
Line 4b– 28% rate gain– Amounts reported in Box 4b are not considered passive income. Amounts entered on this line will automatically flow to a 28 Rate Gain Worksheet Line 4, and then to Schedule D (Form 1040), Line 18.
Line 4c– Unrecaptured section 1250 gain– Amounts reported in Box 4c are not considered passive income. Amounts entered on this line will automatically flow to an Unrecaptured Section 1250 Gain Worksheet, Line 11, and then to Schedule D (Form 1040), Line 19.
Line 5–Other portfolio and nonbusiness income – Amounts reported in Box 5 are not considered passive income, and consist of this beneficiary/taxpayer's share of any royalties, annuities and other income items (such as retirement benefits paid to an estate, investment income from other entities owned by the estate or trust such as pas through entities such as partnerships and S-Corporations or income with respect to a decedent) not otherwise reported on other Lines of the Schedule K-1 (1041). Amounts entered on this line will automatically flow to Schedule E (Form 1040), Part III, Line 33(f) as nonpassive income from an Estate or Trust.
Line 6 – Ordinary business income - Amounts reported in Box 6 represent the income from the ordinary business operations of the estate or trust. Normally the income reported in this Box 6 comes from a Schedule C or Schedule F that was reported on the entity's Form 1041, and the estate or trust paid, credited or was required to distribute this income to the beneficiary. Amounts entered on this line as passive income will automatically flow to Schedule E (Form 1040), Part III, Line 33(d) unless a passive loss carryover or a passive loss from another activity exists, which may otherwise reduce or eliminate this income. Amounts entered as non passive income will flow to Schedule E (Form 1040), Part III, Line 33(f).
Line 7 – Net rental real estate income - Amounts reported in Box 7 represent the net income from the rental business operations of the estate or trust. Normally the income reported in this Box 7 comes from a Schedule E that was reported on the entity's Form 1041, and the estate or trust paid, credited or was required to distribute this income to the beneficiary. Amounts entered on this line as passive income will automatically flow to Schedule E (Form 1040), Part III, Line 33(d) unless a passive loss carryover or a passive loss from another activity exists, which may otherwise reduce or eliminate this income. Amounts entered as non passive income will flow to Schedule E (Form 1040), Part III, Line 33(f).
Line 8 – Other rental income - Amounts reported in Box 8 represent the income from other rental operations of the estate or trust that are not real estate. Amounts entered on this line as passive income will automatically flow to Schedule E (Form 1040), Part III, Line 33(d) unless a passive loss carryover or a passive loss from another activity exists, which may otherwise reduce or eliminate this income. Amounts entered as non passive income will flow to Schedule E (Form 1040), Part III, Line 33(f).
NOTE: This is a guide on entering the Income items from Schedule K-1 (Form 1041) for a Beneficiary Filing Form 1040 into the tax program. This is not intended as tax advice.
Additional Resources:
Instructions for Schedule K-1 (1041) for a Beneficiary Filing a Form 1040
Schedule K-1 (Form 1041) - Heading Information
Schedule K-1 (Form 1041) - Income Items
Schedule K-1 (Form 1041) - Deductions, Credits & Other Items