K-1s, estates and trusts, untangled
K-1s are where many returns go wrong: income you were taxed on but never received, losses you cannot use yet, and estates that paid beneficiaries before paying the tax.
A Schedule K-1 reports your share of income, losses and credits from a partnership, S-corporation, estate or trust. You owe tax on that share whether or not you received cash. Jerome prepares the entity return that issues K-1s, including estate and trust returns on Form 1041, and makes sure the K-1 lands correctly on each owner's or beneficiary's return.
Partnership and S-corporation K-1s
Owners pay tax on their share of profit even if the business kept the cash. Losses are limited by your basis, your amount at risk and the passive activity rules. S-corporation shareholders now report basis on Form 7203 in many situations, so tracking it year to year matters.
Partnership and S-corporation returns are due March 15 for calendar-year businesses, so owners can file by April 15. See business tax returns.
Estates and trusts (Form 1041)
When someone passes away, their estate may need a final personal return and an estate income tax return for income earned after death. Trusts file their own returns too.
Income a trust or estate distributes generally passes to the beneficiaries on a K-1 and is taxed to them. Income it keeps is taxed to the trust or estate, at rates that climb to the top bracket at a much lower income than for individuals. Timing distributions, and paying the tax before money goes out the door, avoids unpleasant surprises for everyone.
Florida notes
- Florida has no state estate tax and no state personal income tax
- Large estates may still owe the federal estate tax (Form 706)
- Out-of-state property or beneficiaries can bring other states' rules into play
Common questions
Why do I owe tax on a K-1 when I did not receive any money?
Partnerships and S-corporations are pass-through entities: the profit is taxed to the owners when it is earned, not when it is distributed. That is why owners often need to make quarterly estimated payments.
When is a trust or estate return due?
For calendar-year trusts and estates, Form 1041 is due April 15, with an extension available to September 30. Estates can sometimes choose a fiscal year, which can help with timing.
I am the executor. Where do I start?
Gather the final year's tax documents, get an EIN for the estate, and keep estate money separate from personal accounts. Then talk to Jerome before making distributions.
It's always tax time. Let's get ahead of it.
Tell me what is going on with your taxes or your business. A short call is usually enough to know the next step.