Preparing Trust Returns
At Strategic Direction, Inc., we understand that preparing tax returns can take a lot of time, not to mention how difficult it can be to master the ever-changing tax code with any degree of certainty. That is why it is so important to choose a reputable accounting firm that keeps current with tax laws—one that works with accounting professionals who take pride in possessing expert knowledge and the personal attention they give each client. Whether you are in need of help with an individual return or a trust return, we can help!
The Key Differences Between and Individual Tax Return and a Trust Return
Individuals who are the designated beneficiaries of a trust are required to file a separate form at the completion of the calendar year. A trust return is not to be confused with an individual return, but rather they are separate and distinct from one another. The trust return impacts the income section that is reported on an individual’s return because as distributions from the trust are taken during the course of the year, they must be reported. The K-1 form summarizes all of the distributions that are taken during the year and reports them as income on an individual tax return. Trust returns are required to be filed on form 1041, and individual tax returns are filed on form 1040.
The Process of Preparing a Trust Return
We have already established that beneficiaries of a trust fund usually receive distributions from the trust. These distributions are generally in the form of a check, or cash, and are eventually reported to the IRS. Before an individual’s tax return could be prepared, the trust must first have a return filed. The process of preparing a trust return may look something like this:
- Income is reported.
- Deductions are calculated and inserted in the appropriate spaces.
- If any taxes have been paid during the year, they are reported.
- Tax liability is calculated. If the trust owes taxes, money must be sent to the appropriate IRS Service Center. It a return is due to the trust, the IRS will send it once the return has been reviewed.
It may sound like simple bookkeeping, but most tax preparers would argue that it is a lot more than bookkeeping. As form 1041 is being prepared, the deductions section asks the preparer to also complete Schedule B. Schedule B is where any distributions that may have been made are reported. The tax preparer must analyze payments that are made, when they happened, how much they were and who received them. This information is transferred to a K-1 which is used when the individual files his or her form 1040. Individuals who are trust beneficiaries, and who have received one or more distributions during the course of the year must wait to file their individual tax return until the trust return has filed.
Assets that Generate Income for Beneficiaries
A trust can house a variety of assets including personal property, real estate, stock or other securities, money and anything else that is of value. If any of the assets produce income, it must be reported to the IRS.
If you are the beneficiary of a trust and you receive one or more distributions during the year, you must report that income to the IRS. Contact Strategic Direction, Inc. at (818) 937-0888 to learn more about tax planning for trusts.