Inheriting property or other assets typically involves filing the appropriate tax forms with the IRS. Schedule K-1 (Form 1041) is used to report a beneficiary’s share of an estate, including income, credits, deductions and profits. Beneficiaries of an inheritance should receive a K-1 tax form inheritance statement for the 2023 tax year by the end of 2023. If you’re the beneficiary estate or trust, it’s important to understand what to do with this form and what it can mean for your tax filing. If you have questions about the specifics of your situation, consider working with a financial advisor.
What Is Schedule K-1 (Form 1041)?
Schedule K-1 (Form 1041) is an official IRS form that’s used to report a beneficiary’s share of income, deductions and credits from an estate or trust. Its full name is “Beneficiary’s Share of Income, Deductions, Credits, etc.” The estate or trust is responsible for filing Schedule K-1 for each listed beneficiary with the IRS. And if you’re a beneficiary, you also have to receive a copy of this form.
This form is required when an estate or trust is passing tax obligations on to one or more beneficiaries. For example, if a trust holds income-producing assets such as real estate, then it may be necessary for the trustee to file Schedule K-1 for each listed beneficiary.
Whether it’s necessary to do so or not depends on the amount of income the estate generates and the residency status of the estate’s beneficiaries. If the annual gross income from the estate is less than $600, then the estate isn’t required to file Schedule K-1 tax forms for beneficiaries. On the other hand, this form has to be filed if the beneficiary is a nonresident alien. And that’s regardless of how much or how little income you report.
Contents of Schedule K-1 Tax Form Inheritance Statements
The form itself is fairly simple, consisting of a single page with three parts. Part one records information about the estate or trust, including its name, employer identification number and the name and address of the fiduciary in charge of handling the disposition of the estate. Part two includes the beneficiary’s name and address, along with a designation as a domestic or foreign resident.
The third part covers the beneficiary’s share of current-year income, deductions and credits. That includes all of the following:
- Interest income
- Ordinary dividends
- Qualified dividends
- Net short-term capital gains
- Net long-term capital gains
- Unrecaptured Section 1250 gains
- Other portfolio and nonbusiness income
- Ordinary business income
- Net rental real estate income
- Other rental income
- Directly apportioned deductions
- Estate tax deductions
- Final year deductions
- Alternative minimum tax deductions
- Credits and credit recapture
If you receive a completed Schedule K-1 (Form 1041) you can then use it to complete your Form 1040 Individual Tax Return. This will allow you to report any income, deductions or credits associated with the inheritance of the assets.
You wouldn’t, however, have to include a copy of this form when you file your tax return. That is unless backup withholding is present in Box 13, Code B. The fiduciary will send a copy to the IRS on your behalf. But you would want to keep a copy of your Schedule K-1 on hand in case there are any questions raised later about the accuracy of income, deductions or credits being reported.
Estate Income and Beneficiary Taxation
If you received a Schedule K-1 tax form, inheritance tax rules determine how much tax you’ll owe. Since the estate is a pass-through entity, you’re responsible for paying income tax on the income that comes from it.
The upside is that when you report amounts from Schedule K-1 on your individual return, you can benefit from lower qualified dividend tax rates. And if there’s income from the estate that hasn’t been distributed or reported on Schedule K-1, then the trust or estate would be responsible for paying income tax on it instead of you.
In terms of deductions or credits that can help reduce your tax liability for income inherited from an estate. This can include things like:
- Depletion allocations
- Estate tax deduction
- Short-term capital losses
- Long-term capital losses
- Net operating losses
- Credit for estimated taxes
Again, the fiduciary who’s completing the Schedule K-1 for each trust beneficiary should complete all of this information. But it’s important to check the information that’s in there against what you have in your own records. Therefore, avoid errors in reporting income, deductions or credits. Because if you use that inaccurate information to complete your tax return, you could end up paying too much or too little in taxes.
If you or an estate-planning expert thinks the information in your Schedule K-1 (Form 1041) is incorrect, you can contact the fiduciary to request a new form. If you’ve already filed your taxes using the original form, you’d then have to file an amended return with the updated information.
Schedule K-1 Tax Form for Inheritance vs. Schedule K-1 (Form 1065)
Form 1065, or Schedule K-1, can refer to more than one type of tax form. Therefore, it’s important to understand how they differ. While Schedule K-1 (Form 1041) reports information in relation to an estate or trust’s beneficiaries, you may also receive a Schedule K-1 (Form 1065) if you run a business that’s a pass-through entity.
Specifically, this type of Schedule K-1 form is used to record income, losses, credits and deductions related to the activities of an S-corporation, partnership or limited liability company (LLC). A Form 1065 shows your share of business income and losses.
It’s possible that you could receive both types of Schedule K-1 forms in the same tax year. For example, if you run a business and you’re the beneficiary of an estate, this might happen. If you’re unsure about how to report the income, deductions, credits and other information from either one on your tax return, it may be helpful to get guidance from a tax professional.
The Bottom Line
Receiving a Schedule K-1 tax form is something you should prepare for. This is especially true if you’re the beneficiary of an estate or trust. Again, whether you will receive one of these forms depends on whether you’re a resident or nonresident alien and the amount of income the trust or estate generates. Talking to an estate planning attorney can offer more insight into the taxes on estate income. This will help you build a strategy for managing your inheritance.
Tips for Estate Planning
- Consider talking to a financial advisor about the financial implications of inheriting assets. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have free introductory calls with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- One way to make the job of filing taxes easier is with a free, easy-to-use tax return calculator. Also, you might consider creating a trust within your own estate plan if you have significant assets.
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