A Schedule K-1 (Form 1041) is the form used to report the income a beneficiary derives from an estate or trust during the applicable tax year. The estate or trust will file its return, and the Internal Revenue Service (IRS) will check for consistency in both forms. A penalty may apply for inconsistencies. The beneficiary should contact the fiduciary right away regarding any errors on the schedule K-1. If the beneficiary and fiduciary cannot agree upon the accuracy of the form, the beneficiary should file Form 8082 to avoid penalties.
There are three parts to fill out on Schedule K-1:
- information about the estate or trust;
- information about the beneficiary; and
- the beneficiary's share of the current year's income, deductions, credits and other items.
The beneficiary needs to know the trust's or estate's employer identification number, and the form requires the beneficiary's own identification number, such as a Social Security number for individuals.
The IRS requires the beneficiary to report income on Schedule K-1 in various categories, including
- interest income,
- ordinary and qualified dividends,
- net short-term and long-term capital gains,
- ordinary business income, and
- net rental real estate income.
There are deductions on Schedule K-1 that can offset some of the tax liability (if any), such as estate tax deductions.