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 beneficiaryâs 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 youâre the beneficiary of an estate or trust, itâs 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 thatâs used to report a beneficiaryâs share of income, deductions and credits from an estate or trust. Itâs full name is âBeneficiaryâs Share of Income, Deductions, Credits, etc.â The estate or trust is responsible for filing Schedule K-1 for each listed beneficiary with the IRS. And if youâre 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 itâs necessary to do so or not depends on the amount of income the estate generates and the residency status of the estateâs beneficiaries. If the annual gross income from the estate is less than $600, then the estate isnât 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 beneficiaryâs name and address, along with a box to designate them as a domestic or foreign resident.
Part Three covers the beneficiaryâs 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 wouldnât, 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
If you received a Schedule K-1 tax form, inheritance tax rules determine how much tax youâll owe on the income from the estate. Since the estate is a pass-through entity, youâre responsible for paying income tax on the income thatâs 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 thereâs income from the estate that hasnât 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:
- Depletion allocations
- Estate tax deduction
- Short-term capital losses
- Long-term capital losses
- Net operating losses
- Credit for estimated taxes
Again, the fiduciary whoâs completing the Schedule K-1 for each trust beneficiary should complete all of this information. But itâs important to check the information thatâs included against what you have in your own records to make sure that itâs correct. If thereâs 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 youâve already filed your taxes using the original form, youâd 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 itâs important to understand how they differ. While Schedule K-1 (Form 1041) is used to report information related to an estate or trustâs beneficiaries, you may also receive a Schedule K-1 (Form 1065) if you run a business thatâs 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.
Itâs 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 youâre the beneficiary of an estate. If youâre 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
Receiving a Schedule K-1 tax form is something you should be prepared for if youâre the beneficiary of an estate or trust. Again, whether you will receive one of these forms depends on whether youâre 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 donât have a financial advisor yet, finding one doesnât have to be complicated. SmartAssetâs financial advisor matching tool can help you connect with professional advisors in your local area in minutes. If youâre 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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The post A Guide to Schedule K-1 (Form 1041) appeared first on SmartAsset Blog.
Sending cash to friends and family? Before you reach for that credit card, grab a calculator. Itâs time to do a little math.
With most everything you purchase online or through apps, credit cards have the edge. With plastic, you have chargeback rights. If youâre overcharged or receive the wrong item, broken merchandise or nothing at all, your card issuer will make it right. And if you use a rewards card, you collect points or miles, too. Win-win.
But itâs different story when youâre sending money through peer-to-peer platforms. Many of them (like Google Pay, Popmoney and Zelle), donât allow consumers to use a credit card to send cash.
Others (like Cash App, PayPal and Venmo), allow credit cards but also charge a fee for the privilege â often about 3%.
See related: How to choose a P2P payment service
The hidden costs of using credit cards to send money
Choose a credit card to send money and you might also end up paying additional fees to your card issuer. Thatâs because the combination of some peer-to-peer apps with certain cards are coded as cash advances, rather than purchases.
For many cards, that cash advance code triggers a higher interest rate that kicks in the moment you make the transaction, as well as a separate cash advance fee thatâs often $10 or 5% of the transaction â whichever is higher. (Currently, the average interest rate for cash advances is 24.8%, while the average APR for purchases is 16.05%.)
So the combination of peer-to-peer service fees, credit card cash advance fees and that higher interest rate (with no grace period) could make sending a few hundred dollars a bit more costly than youâd planned.
No chargeback rights with credit cards
The real kicker: Unlike other venues, you donât have chargeback rights when you use credit cards to make peer-to-peer money transfers.
When you present your credit card in an online or brick-and-mortar store, thereâs a merchant involved â and the law provides chargeback rights for your protection in case you donât get what you were promised in the deal. But in a peer-to-peer money transfer, thereâs no merchant, so currently the laws donât give consumers any chargeback rights, says Christina Tetreault, manager of financial policy for Consumer Reports.
âThe chargeback right requires a merchant,â says Tetreault. âOne of the hoops a consumer has to jump through is to try and work it out with the merchant.â
If you use a peer-to-peer service and send the wrong amount or send the money to the wrong person, most platforms advise that the only way to get it back is to contact the recipient and ask them to return it. And thatâs often the same whether you use a credit card, debit card, bank account or funded account on the platform.
âBe doubly sure when youâre sending the money that youâre putting in the correct information,â says John Breyault, vice president of public policy, telecommunications and fraud for the National Consumers League. âItâs still a buyer beware world when it comes to peer-to-peer.â
If youâre sending money and want to use a credit card, it pays to do a little sleuthing first. Check out the peer-to-peer site. Does it allow users to send money with a credit card? If so what, if any, fees does it charge?
On some platforms (PayPal is one), you could see similar fees for using a debit card â while sending from a bank account or funded account on the platform is free.
The good news is that many peer-to-peer platforms clearly disclose it when thereâs an extra charge to use a credit card, says Tetreault. With Venmo, for example, youâll get a pop-up message.
Harder to decipher: Will credit card transactions on the platform be treated as a cash advance? If your preferred platform doesnât post this information, you might need to contact customer service. (And how quickly and easily you get an answer can tell you a lot, too.)
Ask your card issuer the same question: Are peer-to-peer money transfers on the platform youâve chosen treated as a cash advance? If they are, whatâs the interest rate, and whatâs the cash advance fee?
âWhat I would suggest is to ask that question, via email, of your financial institution,â says Tetreault. âIt may be in their FAQs. And you want to save that email. If you have it in writing, if thereâs an issue later, youâre better positioned to contest that fee.â
But âthe hard truth is you may not be able to find out ahead of time,â she says.
Another solution: Opt to use a credit card issued by a credit union.
âWith credit unions, the APR is usually the sameâ for purchases and cash advances, says John Bratsakis, president and CEO of the Maryland and District of Columbia Credit Union Association.
Likewise, with American Express cards you pay your regular interest rate and no cash advance fees on peer-to-peer transfers, says Elizabeth Crosta, vice president of public affairs for American Express.
And credit cards from U.S. Bank register peer-to-peer money transfers as regular purchases â with no cash advance fees or cash advance APRs, says Rick Rothacker, spokesperson for the bank.
See related: How do credit card APRs work?
Whatâs your reason for using a credit card?
Take a good look at the reason youâre using a credit card, too. If you want chargeback rights, thatâs not an option. If youâre doing it for the rewards, will the value of those points or miles be eaten up by extra fees or a higher interest rate you have to pay to use the card?
And if youâre using a card because you donât have the cash, that might be a good reason to rethink the idea of sending money in the first place.
Thatâs a huge red flag, says Bruce McClary, vice president of public relations at theÂ National Foundation for Credit Counseling.
âThe need to convert credit into cash is what really gets my attention â because that hints at a lack of savings,â he said. âItâs a reality a lot of people are facing, especially now.â
Cash advances arenât as expensive or risky as payday loans and car title loans, but they should be among your last resorts. If you’re looking for short-term relief, you could ask your credit card issuer for help, or find out if you qualify for a personal loan. You could also borrow from a family member or trusted friend, but be wary of the potential relationship toll if you can’t pay them back.
Getting cash from credit cards
Fifty-two percent of Americans report that the pandemic has damaged their finances, according to a recent survey by the NFCC. More than a fifth of those had to tap savings for everyday expenses, while 16% increased their credit card spending.
And thatâs a sign of financial stress, says McClary. âIt means that, in some situations, they have run out of savings.â
There are ways you can use your card to get cash, though.
Cashing in rewards
Some rewards cards from issuers such as Chase, Bank of America and US Bank let you deposit cash-back rewards directly to your bank account.
And Wells Fargo also will let you deposit its Go Far Rewards directly into another Wells Fargo customerâs account, says Sarah DuBois, spokesperson for the bank.
Many credit cards let you convert rewards into retail gift cards. So a pile of points can help a friend or family member buy much-needed groceries or a few holiday presents.
Or simply âbuy a gift card for someone,â says Bratsakis.
Retailer-specific gift cards and gift cards issued through local and regional retail associations and malls often come with no fees â meaning every dollar you spend goes toward your gift.
While you can get a cash advance or use convenience checks from your card issuer, both those options often come with fees and higher interest rates. Not a smart money move, especially in the current economy.
While some lenders may offer convenience checks with deferred interest, thatâs not the same as âno interest,â says Bratsakis. Also, if you donât pay the loan in full, will you owe the full interest retroactively?
âThatâs where consumers have to be careful,â he says. With a convenience check or even a cash advance, âthatâs usually where consumers can get themselves into trouble if they canât pay it off and get hit with deferred interest.â
See related: What is deferred interest?
When it comes to peer-to-peer payments, cash really is king. You can then put it into a funded account with the money transfer platform or your bank account. And most peer-to-peer platforms let you do this for free.
âThe safest way to use these services is to send money person-to-person and be diligent about getting all the details correct so it doesnât go to the wrong person,â says Tetreault.
Only send to people you trust and know in real life, she says. âAnd before sending money make sure you understand what, if any, fees you might incur.â