Generally, net investment income includes gross income from interest, dividends, annuities, and royalties. The estate's or trust's portion of net investment income tax is calculated on Form 8960 Net Investment Income Tax—Individuals, Estates, and Trusts and is reported on Form 1041 U.S. Income Tax Return for Estates and Trusts, Schedule G, Line 4.
Schedule K-1 (Form 1041) Beneficiary’s Share of Income, Deductions, Credits, etc. , Box 14, Codes "E" and "H" are used to report the beneficiary's share of Net Investment Income (NII). The beneficiary's NII will equal all taxable amounts reported on the Schedule K-1, adjusted by the amount reported in Box 14, code "H." For Schedule K-1, Box 14, Code "E," TaxAct combines the amount of interest income (Schedule K-1, Box 1), ordinary dividends (Schedule K-1, Box 2a), net royalty income (Schedule K-1, Box 5), and the beneficiary’s portion of annuities (Form 8960, Line 3).
If an adjustment is needed to the beneficiary's net investment income for section 1411 net investment income or deductions (see below), a manual adjustment will need to be made on Schedule K-1, Box 14, Code "H."
Per IRS Instructions for Form 1041 and Schedules A, B, G, J, and K-1, on page 35:
Distributions on Net Investment Income. The NIIT is imposed on estates and trusts to the extent it has undistributed net investment income. In order to arrive at the estate or trust’s undistributed net investment income, the estate or trust’s NII is reduced for (1) distributions of NII to beneficiaries, and (2) NII allocable to charities when the estate or trust is allowed a deduction under section 642(c). Instructions for Form 8960, line 18, provide more information on the calculation of undistributed net investment income.
Beneficiary reporting. In general, the amount of the income distribution deduction (from Form 1041, Schedule B, line 15) that reduces the estate or trust’s NII will be the amount of NII that will be taxable to the beneficiaries on their Schedules K-1 (Form 1041).
The Schedule K-1 has a code H in box 14 to report the amount of net investment income distributed to the beneficiary. The amount reported in code H represents an adjustment (either positive or negative) that the beneficiary must use in completing its Form 8960 (if necessary). In the case where the trust’s income distribution deduction allowed in calculating undistributed net investment income is less than the amount on Schedule B, line 15, then code H will show a negative number that is the difference between the two amounts. In the case of an estate or trust that issues more than one Schedule K-1 for a year, the sum of the amounts reported in code H on all of the Schedules K-1 will be the difference between Schedule B, line 15, and the amount deducted on Form 8960, line 18b, for amounts of NII distributed to a beneficiary.
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TIP: The beneficiary's NII will equal all taxable amounts reported on the Schedule K-1, adjusted by the amount reported in box 14, code H.
TIP: The only instance where code H will be a positive number is when:
Special rules. In the final year of an estate or trust, deductions in excess of income may be reported to the beneficiary on Schedule K-1, box 11. These deductions may also be deductible by the beneficiary for NIIT purposes. In this situation, the terminating estate or trust should provide the beneficiary information regarding whether the amounts reported in box 11, codes A through E, include any amounts that are deductible for NIIT purposes. See Regulations section 1.1411-4(g)(4).
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