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My husband and I had to deal with canceled debt from a Deed in Lieu of Foreclosure on a second home with our 2012 taxes. We never had to deal with this type of tax experience and needless to say, we were fearful. Owing taxes on possible additional income was stressful. We searched for CPA’s as well as info about DILs and how Insolvency worked. When we came across Gary’s website, we were impressed. We found his website 8 months prior to tax season. We kept it as a “Favorite” as we knew we would need to contact him for assistance. When it was time to get a CPA, we called Gary. We felt relieved that we actually had someone that not only understood our concerns but was an expert in this area. He walked us through the process and all the time telling us not to worry. When our taxes were completed, you cannot imagine the relief we had when we actually were able to get a refund.

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Where Do Estate Excess Deductions on Termination from Form 1041 go on my 2015 personal tax return? | Form 1041 CPA offers Schedule K-1 explanation of IRS Form 1041

Form 1041 CPA explains excess deductions on termination

Gary Bode, CPA: If you need help preparing Form 1041, please consider calling us for a free phone consult at (910) 399-2705.

Hi, I’m Gary Bode, a Form 1041 CPA with a virtual office. When a loved one dies, there are usually multiple “one of” tasks that need attention, exacerbating an emotionally difficult time. Here are some common questions I get. Unfortunately the IRS Form 1041 instructions aren’t great, so maybe this post is a primer for preparing Form 1041, U.S. Income Tax Return for Estates and Trusts. 

I prepared Form 1041 myself, but where do the Excess Deductions on Termination (Line 11A of Form 1041’s Schedule K-1) go on my personal Form 1040?

First a Form 1041 Overview

  • Form 1041. The Income an Estate earns gets presented on IRS Form 1041. Form 1041 uses multiple sub-schedules to calculate its Taxable Income based on a calendar or fiscal year. As with most tax forms, you must report income, but have the right to deduct expenses. Deductions are not always the same as defined on the more familiar Form 1040.
  • Every beneficiary on Form 1041 receives a Schedule K-1 from the estate. Schedule K-1 allocates the beneficiary’s financial information from Form 1041.
  • Each beneficiary includes the numbers from Schedule K-1 on their Form 1040. Of course the IRS gets a copy of Schedule K-1 too, so they look for this info on the beneficiary’s tax return.

Excess Deductions on Termination – Line 11A of Form 1041’s Schedule K-1 – a Two Tiered Process on Schedule A of Form 1040

  • Sometimes the Estate’s deductions exceed the income. So no tax is due from Form 1041.
  • The excess deductions flow through Form 1041 into Line 11A of the Schedule K-1 for each beneficiary, as allocated by Form 1041.
  • Look for these excess deductions on termination, from Line 11A of Schedule K-1, on your Form 1040’s Schedule E. Schedule E is the usual placement for Schedule K-1s from Estates, Corporations and Partnerships. But there’s a twist.
  • Excess Deductions on Termination go into the Other Deductions section of Form 1040’s Schedule A (Itemized Deductions).
  • Round One. As Itemized Deductions on Schedule A, excess estate deductions on termination must total more than 2% of your Adjusted Gross Income to allow any tax benefit.
  • Round Two. The sum of all sections of Schedule A have to exceed the Standard Deduction. So like many IRS issues, what sounded like there would be a tax deduction gradually gets whittled away.

So, it is a two tier process On Schedule A for the excess deductions from Form 1041 to do you any good on your personal Form 1040 return.

I’m a Form 1041 CPA with a virtual office to serve you where ever you or the beneficiaries live. Sometimes you need a Form 1041 CPA, sometimes you don’t. Lots of Folks do self prepare. We prepare associated State estate tax returns, too, of course.  If self preparation of Form 1041 gets worrisome, please consider giving us a call at (910) 399-2705 for a free initial consult.  Our posts should give you a feel for our ability and proactive attitude.

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8 comments to Where Do Estate Excess Deductions on Termination from Form 1041 go on my 2015 personal tax return? | Form 1041 CPA offers Schedule K-1 explanation of IRS Form 1041

  • Mike Hoenig

    What if one of the bebeficiaries is another Trust. Is it treated the same? Deductions subject to 2%? I assumed that was correct, but my software will not pick it up at all.

  • Lee Goss

    Hi Gary. I am preparing a friends return and I searched internet and found this thread. Thank you. I have similar question as Mike Hoenig above, the trust is the sole beneficiary at termination of the Probate estate, and received the sole K-1, which has excess deductions. Where are these items deducted on the Trust, which is not in it’s final year? The Trust has income for the year and has made distributions to the Trust’s beneficiaries. I just need to know where to deduct or how to handle the excess deduction on return of the trust and/or it’s K-1s. Thank you.

  • Mary Neary

    I work with a not for profit that has received a K-1 that is reporting a Excess Deduction on Termination. What do we do with this on our Form 990? The not for profit does not pay taxes, so excess deductions appear to be irrelevant for us. Any thoughts on whether we need to show this anywhere on our 990? Thank you.

  • BOB

    I have completed returns from 2007-2013 and this years which isn’t done for a family trust. distributions of principal were made, nothing else. no K-1’s were ever issued. Two properties were sold at a loss. deductions always were larger than income for every year. none of the returns have any entry on line 15a or b for net operating ;losses that occurred each year. I thinks there are issues as to how they were prepared. can you give est. as to what it would cost to make amended returns and issue K-1’s

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