I received a Form 1041, Schedule K-1 from the final return of a relative's trust and would appreciate a clarification of its meaning. There are two entries:
Box 11A - Excess deductions on termination (let's say $5000)
Box 11B - Capital loss carryover (let's say $50,000)
First, my understanding is that I should file an amended return for the 2014 tax year in which I now add the $5000 deductions in Box 11A to my itemized deductions for the year, thus lowering my taxable income and resulting tax. The entire amount must be applied to the 2014 tax year and cannot be carried over to a succeeding year which necessitates the amended return. Is that correct? Also, I had to file an out-of-state (non-resident) state return for North Dakota in which my federal return numbers were used in calculations. (No state income tax in my state of residence.) I should also file an amended return for North Dakota as well, correct?
Second, with regard to the capital loss carryover am I correct that I can use this amount to offset capital gains in future years on my individual return along with an additional $3000 deduction per year in excess of actual gains? And that this carryover continues indefinitely until exhausted? Any help is appreciated. Thanks.
Assuming the K-1 was for the year ended December 31, 2014 (make sure it is not a fiscal year end, if so that would be for 2015, which is common for estates).
Yes, you would amend the 2014 federal and state tax return to claim the "excess deductions" noted in line 11A as an additional itemized deduction. From IRS (instructions to 1041 K-1)
"If this is the final return of the estate or trust, and there are excess deductions on termination, you may deduct the beneficiary’s share of the excess deductions on line 23 of Schedule A (Form 1040) as a miscellaneous itemized deduction subject to the 2% floor.
Excess deductions on termination occur only during the last tax year of the trust or decedent’s estate when the total deductions (excluding the charitable deduction and exemption) are greater than the gross income during that tax year. Only the beneficiary of an estate or trust that succeeds to its property is allowed to deduct that entity’s excess deductions on termination. A beneficiary who does not have enough income in that year to absorb the entire deduction may not carry the balance over to any succeeding year"
For the item noted in 11B...
"Box 11, Codes B and C—Unused Capital Loss Carryover
Upon termination of the trust or decedent’s estate, the beneficiary succeeding to the property is allowed to deduct any unused capital loss carryover under section 1212.
A short-term capital loss carryover, reported as code B, is reported on Schedule D (Form 1040), line 5.
A long-term capital loss carryover, reported as code C, is reported, as appropriate, on Schedule D (Form 1040), line 12; line 5 of the 28% Rate Gain Worksheet for Schedule D, line 18; and line 16 of the Unrecaptured Section 1250 Gain Worksheet for Schedule D, line 19."
You would reduce any capital gains in 2014 for the amount noted. Any unused capital losses in 2014 would be carried over to 2015.