A Guide to Schedule K-1 (Form 1041)

Man prepares his tax returnsInheriting 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 or trust, including income as well as credits, deductions and profits. A K-1 tax form inheritance statement must be sent out to beneficiaries at the end of the year. If you’re the beneficiary of an estate or trust, it’s important to understand what to do with this form if you receive one and what it can mean for your tax filing.

Schedule K-1 (Form 1041), Explained

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. It’s 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, regardless of how much or how little income is reported.

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 box to designate them as a domestic or foreign resident.

Part Three 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 to report any income, deductions or credits associated with inheriting assets from the estate or trust.

You wouldn’t, however, have to include a copy of this form when you file your tax return unless backup withholding was reported 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

Woman prepares her tax returns

If you received a Schedule K-1 tax form, inheritance tax rules determine how much tax you’ll owe on the income from the estate. Since the estate is a pass-through entity, you’re responsible for paying income tax on the income that’s generated. The upside is that when you report amounts from Schedule K-1 on your individual tax return, you can benefit from lower tax rates for qualified dividends. 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, those can include things like:

  • Depreciation
  • Depletion allocations
  • Amortization
  • 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 included against what you have in your own records to make sure that it’s correct. If there’s an error in reporting income, deductions or credits and you use that inaccurate information to complete your tax return, you could end up paying too much or too little in taxes as a result.

If you think the information in your Schedule K-1 (Form 1041) is incorrect, you can contact the fiduciary to request an amended 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)

Schedule K-1 can refer to more than one type of tax form and it’s important to understand how they differ. While Schedule K-1 (Form 1041) is used to report information related to an estate or trust’s beneficiaries, you may also receive a Schedule K-1 (Form 1065) if you run a business that’s set up as 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 Schedule K-1 (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 if you run a pass-through business and you’re the beneficiary of an estate. If you’re confused 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

Senior citizen prepares her tax returnsReceiving a Schedule K-1 tax form is something you should be prepared for 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 how estate income is taxed as you plan a strategy for managing an inheritance.

Tips for Estate Planning

  • Consider talking to a financial advisor about the financial implications of inheriting assets. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool can help you connect with professional advisors in your local area in minutes. If you’re ready, get started now.
  • One way to make the job of filing taxes easier is with a free, easy-to-use tax return calculator. Also, creating a trust is something you might consider as part of your own estate plan if you have significant assets you want to pass on.

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Per Stirpes vs. Per Capita in Estate Planning

Three generations of one familyWhen creating an estate plan, one of the most basic documents you may wish to include is a will. If you have a more complicated estate, you might also need to have a trust in place. Both a will and a trust can specify how you want assets distributed among your beneficiaries. When making those decisions, it’s important to distinguish between per stirpes and per capita distributions. These are two terms you’re likely to come across when shaping your estate plan. Here’s a closer look at what per stirpes vs. per capita means.

Per Stirpes, Explained

If you’ve never heard the term per stirpes before, it’s a Latin phrase that translates to “by branch” or “by class.” When this term is applied to estate planning, it refers to the equal distribution of assets among the different branches of a family and their surviving descendants.

A per stirpes designation allows the descendants of a beneficiary to keep inherited assets within that branch of their family, even if the original beneficiary passes away. Those assets would be equally divided between the survivors.

Here’s an example of how per stirpes distributions work for estate planning. Say that you draft a will in which you designate your adult son and daughter as beneficiaries. You opt to leave your estate to them, per stirpes.

If you pass away before both of your children, then they could each claim a half share of your estate under the terms of your will. Now, assume that each of your children has two children of their own and your son passes away before you do. In that scenario, your daughter would still inherit a half share of the estate. But your son’s children would split his half of your estate, inheriting a quarter share each.

Per stirpes distributions essentially create a trickle-down effect, in which assets can be passed on to future generations if a primary beneficiary passes away. A general rule of thumb is that the flow of assets down occurs through direct descendants, rather than spouses. So, if your son were married, his children would be eligible to inherit his share of your estate, not his wife.

Per Capita, Explained

Older couple signs a will

Per capita is also a Latin term which means “by head.” When you use a per capita distribution method for estate planning, any assets you have would pass equally to the beneficiaries are still living at the time you pass away. If you’re writing a will or trust as part of your estate plan, that could include the specific beneficiaries you name as well as their descendants.

So again, say that you have a son and a daughter who each have two children. These are the only beneficiaries you plan to include in your will. Under a per capita distribution, instead of your son and daughter receiving a half share of your estate, they and your four grandchildren would each receive a one-sixth share of your assets. Those share portions would adjust accordingly if one of your children or grandchildren were to pass away before you.

Per Stirpes vs. Per Capita: Which Is Better?

Whether it makes sense to use a per stirpes or per capita distribution in your estate plan can depend largely on how you want your assets to be distributed after you’re gone. It helps to consider the pros and cons of each option.

Per Stirpes Pros:

  • Allows you to keep asset distributions within the same branch of the family
  • Eliminates the need to amend or update wills and trusts when a child is born to one of your beneficiaries or a beneficiary passes away
  • Can help to minimize the potential for infighting among beneficiaries since asset distribution takes a linear approach

Per Stirpes Cons:

  • It’s possible an unwanted person could take control of your assets (i.e., the spouse of one of your children if he or she is managing assets on behalf of a minor child)

Per Capita Pros:

  • You can specify exactly who you want to name as beneficiaries and receive part of your estate
  • Assets are distributed equally among beneficiaries, based on the value of your estate at the time you pass away
  • You can use this designation to pass on assets outside of a will, such as a 401(k) or IRA

Per Capita Cons:

  • Per capita distributions could trigger generation-skipping tax for grandchildren or other descendants who inherit part of your estate

Deciding whether it makes more sense to go with per stirpes vs. per capita distributions can ultimately depend on your personal preferences. Per stirpes distribution is typically used in family settings when you want to ensure that individual branches of the family will benefit from your estate. On the other hand, per capita distribution gives you control over which individuals or group of individuals are included as beneficiaries.

Review Beneficiary Designations Periodically

Multi-generational family

If you have a will and/or a trust, you may have named your beneficiaries. But it’s possible that you may want to change those designations at some point. If you named your son and his wife in your will, for example, but they’ve since gotten divorced you may want to update the will with a codicil to exclude his ex-wife. It’s also helpful to check the beneficiary designations on retirement accounts, investment accounts and life insurance policies after a major life change.

For example, if you get divorced then you may not want your spouse to be the beneficiary of your retirement accounts. Or if they pass away before you, you may want to update your beneficiary designations to your children or grandchildren.

The Bottom Line

Per stirpes and per capita distribution rules can help you decide what happens to your assets after you pass away. But they both work very differently. Understanding the implications of each one for your beneficiaries, including how they may be affected from a tax perspective, can help you decide which course to take.

Tips for Estate Planning

  • Consider talking to a financial advisor about how to get started with estate planning and what per stirpes vs. per capita distributions might mean for your heirs. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool can help you connect, within minutes, with a professional advisor in your local area. If you’re ready, get started now.
  • While it’s always a good idea to consult with a financial advisor about estate planning, you can take a do-it-yourself approach to writing a will by doing it online. Here’s what you need to know about digital DIY will writing.

Photo credit: ©iStock.com/Georgijevic, ©iStock.com/monkeybusinessimages, ©iStock.com/FatCamera

The post Per Stirpes vs. Per Capita in Estate Planning appeared first on SmartAsset Blog.

Source: smartasset.com

Which is the best card to use on Amazon.com purchases?

The Amazon Rewards Visa and Amazon Prime Rewards Visa Signature cards have become hot items for frequent Amazon shoppers, and for good reason. They are great cards that, for the most part, can’t be beat when it comes to earning cash back on Amazon purchases.

The Amazon Rewards Visa gives you 3% cash back on every Amazon purchase, and the Amazon Prime Visa Signature ups that ante, offering 5% cash back for Amazon Prime account holders.

You may be wondering: Which of these is the best card to use on Amazon purchases? For that matter, are there any other cards out there that could earn an even better rewards rate on Amazon purchases?

While the deck seems to be stacked clearly in favor of Amazon credit cards, there are some alternatives that may surprise you.

Amazon Rewards Visa: Best for non-Prime members

  • Amazon Prime Rewards Visa Signature: Best for Prime members
  • Discover it® Cash Back: Best for Prime Day and the holiday season
  • Citi® Double Cash Card: Best for high flat cash back rate
  • Comparing Amazon cards

    Let’s start by comparing the regular Amazon card to the Amazon Prime card. While the 5% cash back rate on the Amazon Prime Visa Signature card seems to be the best way to go, this is not necessarily the case. The best option mostly boils down to your shopping habits on Amazon.

    Here’s a breakdown of the two cards:

    Amazon Rewards Visa vs. Amazon Prime Rewards Visa Signature

    Amazon Rewards Visa
    Amazon Rewards Visa*
    Amazon Prime Visa Signature
    Amazon Prime Rewards Visa Signature*
    Rewards rate
    • 3% cash back on Amazon and Whole Foods purchases
    • 2% cash back on gas, restaurant and drugstore purchases
    • 1% cash back on general purchases
    • 5% back on Amazon.com and Whole Foods purchases
    • 2% back on restaurant, gas station and drugstore purchases
    • 1% back on other purchases
    Sign-up bonus $50 Amazon.com gift card when you’re approved $70 Amazon.com gift card when you’re approved
    Annual fee $0 $0
    Estimated yearly rewards value ($1,325 monthly spend, including sign-up bonus) $243 $195
    • No membership fee required
    • Offers higher rate on Amazon purchases than most cards
    • Easy to redeem your cash back
    • Highest rewards rate on Amazon purchases
    • Easy to redeem your cash back
    • Prime membership comes with valuable benefits, including free 2-day shipping
    • There are a few cards with a better overall cash back rate
    • Requires $119 Amazon Prime membership
    Who should get this card?
    • People who spend less than $4,950 per year on Amazon purchases
    • People who don’t want to commit to an Amazon Prime membership
    • Amazon Prime members
    • People who value Amazon Prime services
    • People who spend more than $99 per year on shipping qualified Amazon products
    • People who spend more than $4,950 per year on Amazon purchases
    • People who frequent Whole Foods

    As you can see, though the Amazon Prime card offers a better cash back rate on Amazon purchases as well as a $70 gift card for new cardmembers, you also need to figure in the cost of Amazon Prime membership. This can lower the overall value of the Prime card for you, depending on your spending habits and how much you value Prime membership by itself.

    Amazon.com Store card. Since it can only be used on Amazon purchases, its scope is a bit more limited than the rewards cards; but Prime members can earn a generous 5% cash back. Plus, all cardholders are eligible for special financing terms on larger transactions. Even if you have a lower credit score, you can be approved for a secured version of the card and start racking up cash back from the online retailer.

    See related: Amazon store cards vs. Amazon Visa credit cards

    Best for current and aspiring Amazon Prime members: Amazon Prime card

    For current Amazon Prime members, it’s a no-brainer: 5% cash back with the Amazon Prime card is the way to go. Also, Prime membership comes with valuable benefits, such as free two-day shipping on eligible purchases, free streaming of movies and TV shows with Prime Video and Amazon Family discounts on diapers and baby items. Shelling out the fee for Prime membership and getting the Prime card is a good deal if you value these types of services.

    Best if you spend more than $119 per year on Amazon shipping: Amazon Prime card

    Amazon Prime comes with some awesome shipping benefits. Not only do you get free standard shipping on qualified Amazon purchases of any amount, but you also qualify for free two-day shipping and – in certain cities – free one-day, same-day and two-hour deliveries.

    Amazon Prime free shipping

    Two-Day Shipping Free
    Same-Day Delivery Free in certain cities
    Two-Hour Delivery Free in eligible ZIP codes
    One-Day Shipping Free in certain cities
    Saturday Shipping Price varies by item size and weight – as low as $7.99 per item
    No-Rush Shipping Free
    Standard Shipping (4-5 business days) Free
    Release-Date Delivery Free

    Privacy Policy

    Also, be aware that Amazon already offers free standard shipping to non-Prime members for orders over a certain size. And, to compete with Walmart and Target, Amazon recently lowered the threshold for free shipping to $25 in qualified purchases.

    In other words, you’ll need to do a close accounting of your shipping costs to see if the $119 Prime membership fee makes sense. Unless you frequently make small purchases from Amazon, Prime membership may not outweigh your shipping costs.

    Best for Amazon shoppers who spend more than $5,950 per year: Amazon Prime card

    For everyone else, the value breaks down to how much money you spend at Amazon on a yearly basis.

    For cardholders purely interested in the value of the cash back rewards on the Amazon Prime card versus the cost of Prime membership, we figure that the magic number is $5,950 per year (roughly $496 per month). Here’s why: At $5,950 in spending, the amount of cash back that you can earn with the Amazon Prime card minus the cost of the annual membership fee equals the cash back that you can earn with the regular Amazon Visa card.

    Here’s the math for you:

    Amazon Rewards Visa
    Amazon Visa card cash back
    Amazon Prime Visa Signature
    Amazon Prime card cash back
    $5,950/year x 3% cash back = $178.50 $5,950/year x 5% cash back – $119 annual fee = $178.50

    If you spend more than $5,950 on Amazon purchases per year, your Amazon Prime membership stands to net a better value for you. However, that’s a hefty amount of spending on Amazon! If $5,950 is too rich for your budget, the regular Amazon Visa may be the better way to go. 

    Best for casual Amazon shoppers: Amazon Visa card

    Though the Amazon Visa card doesn’t sport a flashy 5% cash back rate, it does offer a pretty good 3% cash back rate on Amazon purchases, which is still higher than most of the other best rewards cards. The card also offers a $60 Amazon gift certificate for signing up, the same seamless redemption options as the Amazon Prime card and many of the same purchase protections and Visa Signature benefits, without requiring you to commit to a Prime membership.

    It’s a good deal, though there is a smattering of opportunities to do better than the card’s 3% cash back rate. Read on to see how.

    Best for Prime Day and the holiday season: Discover it Cash Back

    Discover it® Cash Back

    Where it comes out ahead:

    The potential 10% cash back you get on Amazon purchases in the last quarter of the card’s first year beats every other card (but only applies during the first year).

    Read full review

    Rewards rate:

    • 5% cash back on quarterly rotating categories on up to $1,500 in combined spending, upon enrollment (Amazon.com October-December 2021)
    • 1% cash back on everything else

    Sign-up bonus:
    Double your cash back at end of first year

    Annual fee:


    Estimated yearly rewards value ($15,900 spend):


    If you are signing up for the Discover it Cash Back card for the first time and you plan to do a lot of Amazon shopping on Prime Day and through the holidays, you are in for the ultimate cash back discount on Amazon purchases. Upon enrollment, the card offers 5% cash back on up to $1,500 in combined spending in categories that rotate quarterly (then 1%), and the fourth quarter category for 2021 (October through December) includes Amazon.com purchases. The card then doubles all the cash back that you earn in the first year, so, essentially – you earn 10% cash back on Amazon purchases for a quarter of the first year.

    No other card offers a 10% cash back rate on Amazon purchases. Unfortunately, the 10% rate only applies in the first year during the last quarter. After that, the rate drops to 5%. Plus, the 5% on Amazon purchases is only active October through December, which happens to be peak season for holiday shopping. Still, 5% by itself is not a bad deal, and it beats the 3% cash back rate on the regular Amazon Visa card at least for a quarter of the year.

    Citi® Double Cash Card

    Where it comes out ahead:

    This card earns the highest flat cash back rate on the consumer credit card market, offering 2% cash back (1% when you make a purchase and 1% when you pay it off) on Amazon – and everywhere else.

    Read full review

    Rewards rate:

    • 2% cash back (1% on purchases and 1% when they’re paid off)

    Sign-up bonus:

    Annual fee:


    Estimated yearly rewards value ($15,900 spend):


    If you’re not a Prime member and looking for a credit card that would consistently earn you solid cash back rewards on online shopping and everything else, a flat-rate cash back credit card may be your best bet. In this category, Citi Double Cash Card is hard to beat. The card earns 2% cash back on all purchases – 1% at the time of purchases and 1% when you pay your bill. There’s no limit to how much cash back you can earn.

    Navy Federal Credit Union Visa Signature Flagship Rewards card is another rewards card worth a look if you’ve been on the fence about signing up for Amazon Prime. Through Sept. 30, 2021, the card is offering a free Amazon Prime membership as a sign-up bonus. Even if you’re already a Prime member, you can be reimbursed for the cost of your membership renewal.

    Bonus tip: Buy Amazon gift cards

    An additional way to earn a bonus on Amazon purchases with an outside credit card is to purchase Amazon gift cards at stores where your card offers a category bonus, such as office supply and grocery stores.

    While some cardholders have success with this tactic, there’s no guarantee that your particular store will offer Amazon gift cards or allow you to purchase gift cards with a credit card. (Fraud concerns with gift cards have led some retailers to bar their purchase with credit cards.) However, it’s worth checking the gift card rack, especially if you are trying to collect points on a particular card.

    See related: Guide: How to maximize your cash back on Amazon.com

    *Information about the Amazon Rewards Visa and Amazon Prime Rewards Visa has been collected independently by CreditCards.com. The issuer did not provide the content, nor is it responsible for its accuracy.

    TInformation about this card has been collected independently by CreditCards.com. The issuer did not provide the content, nor is it responsible for its accuracy.he editorial content below is based solely on the objective assessment of our writers and is not driven by advertising dollars. However, we do receive compensation when you click on links to products from our partners. Learn more about our advertising policy

    Source: creditcards.com