Trust IRA – showing Tax credit on K1
I am trustee for my son’s inherited IRA in a trust. The IRA has the trust’s EIN, however RMDs are paid out to my son. Can “estimated” taxes be withheld at the time the distribution is given to my son? In what box on the K1 would the tax credit be shown?
Thanks for your help.
Permalink Submitted by Alan - IRA critic on Sat, 2017-07-15 16:56
Download Form 1041-T from the IRS site. Detailed instructions are on the back of the form. Not sure if this procedure is prone to errors or not. I assume your son does not have other income sources that he could increase direct withholding from. Withholding is more efficient that estimates since it is credited as paid in ratably over the entire year rather than just the date it is paid like estimates are.
Permalink Submitted by David Mertz on Sat, 2017-07-15 18:12
I believe that Form 1041-T can only be used to pass to the beneficiary any estimated taxes paid by the trustee. As far as I know, credit for regular tax withholding (other than backup withholding) cannot be passed through to beneficiaries on Schedules K-1 or Form 1041-T. This means that to be able to pass a credit through to the beneficiary, the entire distribution (without tax withholding) would need to be paid to the trust, estimated tax paid by the trustee from the distribution, Form 1041-T filed to pass to the beneficiary the credit for the estimated tax payment and, of course, the remainder of the distribution paid out to the beneficiary. The entire amount of the distribution from the IRA (including the portion used to pay estimated taxes) would be DNI to the beneficiary. The filing of Form 1041-T needs to be done by the 65th day after the close of the taxable year of the trust. See section 643(g) of the tax code: https://www.law.cornell.edu/uscode/text/26/643#g
Permalink Submitted by Alan - IRA critic on Sat, 2017-07-15 18:49
Yes, agree. I suggested withholding by the beneficiary as an alternative to the estimates and 1041 T. Trust would then pass through the gross RMD to the beneficiary, and beneficiary (if feasible) would independently use withholding from other sources and avoid the estimates.