Trustees and executors have the ability to make certain elections on, or before, March 6, 2023 that could affect 2022 tax returns of the trusts and estates for which they are fiduciaries, as well as the returns of the beneficiaries of those trusts and estates.
Election to treat distributions as made in the prior tax year
A fiduciary of a trust or estate can elect to treat all, or any part, of a distribution made within the first 65 days of a new tax year as having been made in the previous tax year. The 65-day deadline applicable to the 2022 tax year is Monday, March 6, 2023. If a distribution is made on, or before, that date, the fiduciary can elect to treat any, or all, of the distribution as made in the 2022 tax year.
In order to determine whether or not to make this election, the fiduciary should compute the trust’s 2022 fiduciary accounting income, distributable net income and taxable income, and then determine the impact of additional distributions on these three amounts, as well as how the additional distribution would impact the tax situation of the beneficiary. In addition, the fiduciary should factor in the current tax rates and brackets for both fiduciaries and individuals when determining whether to make the election, as the change in rates may impact the final decision.
The fiduciary determines that the trust has taxable income subject to the 37% tax bracket after computing the trust’s distributable net income and fiduciary accounting income. The fiduciary also knows that the beneficiary of the trust is currently subject to the 12% tax bracket. Consequently, the fiduciary determines that it would be beneficial to distribute additional funds from the trust to the beneficiary prior to March 6, 2023 and elect to treat these distributions as having been made in 2022, in order to shift income taxed in the 37% tax bracket to income taxed in the 12% bracket.
As part of this analysis, the fiduciary must also consider the 3.8% Additional Medicare Tax, as well as non–tax factors such as the financial acumen of the beneficiary and the grantor’s desire to distribute additional funds to the beneficiary. Fiduciaries must make note of any amounts elected under this rule for the 2022 tax year and not treat them as current year (2023) distributions.
The election is made by checking the box next to Question 6 on page 2 of Form 1041 (US Income Tax Return for Estates and Trusts). If no return is required to be filed for the taxable year of the trust for which the election is made, the election is made by filing a statement with the Internal Revenue Service. The election is binding on that one tax year only; a fiduciary is free to make or not make the election in subsequent years.
Election to treat certain payments of estimated tax as paid by the beneficiary
A trustee may elect to treat any portion of a payment of estimated tax made by a trust as a payment made by a beneficiary of the trust. This election may also be made by the executor of an estate in a tax year that is reasonably expected to be the last tax year of the estate.
This election must be made on or before the 65th day after the close of the taxable year of the trust, which is Monday, March 6, 2023 for 2022 estimated tax payments.
The election is made by filing Form 1041-T (Allocation of Estimated Tax Payments to Beneficiaries). The election must be made, and the Form 1041-T filed, by March 6, 2023. The Form 1041-T may be filed with the related fiduciary income tax return (Form 1041) if they are both filed on, or before, March 6, 2023. Otherwise, Form 1041-T is filed separately with the Internal Revenue Service Center where the Form 1041 will be filed.
The amount elected is treated as distributed to the beneficiary on the last day of the prior taxable year (i.e., December 31, 2022 for amounts elected by March 6, 2023) and paid by the beneficiary as an estimated payment on January 15 of the following year (i.e., January 15, 2023).
Amounts treated as distributions should be considered by fiduciaries when considering the distribution election discussed above.
A trust made estimated tax payments during the first three quarters of a tax year. The trust’s fiduciary then realizes that a beneficiary attained a certain age, which triggered a mandatory distribution. This mandatory distribution caused the trust’s taxable income to be distributed to the beneficiary. Consequently, the trust is expected to owe little or no tax, but the beneficiary would owe additional tax because of the distribution.
By making the election described above, the trust’s estimated tax payments could be treated as made by the beneficiary.
Please contact your Mazars professional for additional guidance.