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Capital Loss in Trust

 
 
WJB57
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      02-25-2010, 10:07 PM
My mother has a simple trust (a bypass with my father's assets) and I
am struggling with an item for 2009. Using rough numbers, here is the
situation. The trust had $7000 in dividends, and it realized $15,000
in capital losses. It also had $3000 in attorney and advisor
expenses. I realize that the capital loss cannot be passed outside of
the trust to my mother (the trust did not wind up in 2009), so I
understand that $3000 of the capital loss will offset other trust
income. That leaves me with $4000 in income and $3000 in expenses,
for a distributable income of $1000.

It makes sense that I would only be reporting $1000 of income on her
K-1, but the allocation isn't clear. I don't believe it is correct to
put $4000 of dividend income and $3000 in capital loss on her K-1. Of
her $7000 in dividends, some are qualified, some are not. Should I
simply allocate the $1000 in K-1 income along the ratio of the
qualified vs. non-qualified dividends?

Thanks.

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Tom Healy CPA
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      02-26-2010, 01:50 PM
On Feb 25, 3:07*pm, WJB57 <(E-Mail Removed)> wrote:
> My mother has a simple trust (a bypass with my father's assets) and I
> am struggling with an item for 2009. *Using rough numbers, here is the
> situation. *The trust had $7000 in dividends, and it realized $15,000
> in capital losses. *It also had $3000 in attorney and advisor
> expenses. *I realize that the capital loss cannot be passed outside of
> the trust to my mother (the trust did not wind up in 2009), so I
> understand that $3000 of the capital loss will offset other trust
> income. *That leaves me with $4000 in income and $3000 in expenses,
> for a distributable income of $1000.
>
> It makes sense that I would only be reporting $1000 of income on her
> K-1, but the allocation isn't clear. *I don't believe it is correct to
> put $4000 of dividend income and $3000 in capital loss on her K-1. *Of
> her $7000 in dividends, some are qualified, some are not. *Should I
> simply allocate the $1000 in K-1 income along the ratio of the
> qualified vs. non-qualified dividends?
>
> Thanks.
>


It's better than that! You can elect to apply the expenses first to
the non-qualified dividends and then to qualified dividends; that way
you maximize the qualified dividends that pass through to the
beneficiary.

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WJB57
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      02-28-2010, 12:52 AM
>
> It's better than that! You can elect to apply the expenses first to
> the non-qualified dividends and then to qualified dividends; that way
> you maximize the qualified dividends that pass through to the
> beneficiary.
>


Thanks Tom, that's a great answer.

Actually, I am struggling to find clear instructions on how to deduct
this capital loss. Most of what I read seems to suggest that capital
losses can only offset capital gains within a trust (except for in the
final year). However, the Schedule D for 1041 seems to permit the
deduction with a limit of $3000 for capital losses in section IV. And
this capital loss is reported on line 4 of the 1041 form.

For my education, where do I find support for deducting the $3000 loss
against ordinary income (or qualified dividends)?

Thanks.

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<< The foregoing was not intended or written to be used, >>
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<< that may be imposed upon the taxpayer. >>
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      02-21-2011, 04:27 PM
You asked for support on taking the max capital loss of $3000 in your Mother's trust (for 2009). Does the trust require current-year distribution of its income? If so, when you work through Sched 1041 you'll see that the $3000 can be offset against ordinary income, but since the trust distributes its income and has no taxable income, the $3000 ends up being of no impact and it doesn't reduce by $3000 the losses that are carried forward to the next year.
When you reach the final year of the trust, the remaining loss carryforwards are reported out on the K-1. Box 11-B for short term loss carryover, Box 11-C for long term. When the beneficiaries work this through their 1040 and the various worksheets, they'll find that the losses can be offset against their own gains, subject to some complications if (a) they have qualified dividends and/or (b) their adjusted net income exceeds certain limits. But to the extent that individual (not corporate) beneficiaries cannot use up the losses, they can carry them forward indefinitely.
This last point is a subject of much misunderstanding including my own. Many people believe final-year trust capital losses cannot be further carried forward by beneficiaries. The confusion seems to arise from the fact that NOL (reported on K-1, Box 11-A) cannot be carried forward, and also, that corporations have different rules than individuals.
 
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