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From my previous post...

My mother passed away in February of 2012. She had a substantial amount of deferred interest from US savings bonds and therefore a decision was made to distribute the Form 1041 income to the heirs thru K-1 Forms. The Estate will have a Fiscal year end of January 31, 2013. I understand that each of the heirs will be required to roll this income into our calendar year 2013 tax return.

US savings bonds are generally exempt from state income tax. Unfortunately the Form 1041 K-1 line 1 is labeled as “Interest Income” with no description of its nature. I also notice the Form 1041 does not use a schedule B to roll up the “Interest Income” on line 1 and therefore it also has no description of its nature. I'm looking for some kind of documentation to prove that this interest income is in fact deferred US Savings bond interest that is not subject to state income tax.

Would it behoove us to instruct the tax preparer of the Form 1041 to insert the term “See attached schedule” along the dotted line area of line 1 and prepare a supporting schedule itemizing the type of interest income this is or do they typically just file these in an e-file format where this doesn't get to the IRS. The heirs could then also request a copy of the Form 1041 along with their Form 1041 K-1 to have some supporting documentation.
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Since you only gave one option, I can't use Phil's trademarked door number 3. So I guess this would be door number 2.

Bu the answer is probably on the state equivalent of the Federal 1041 K-1. On the state form, there is likely a spot to indicate how much of the interest was from US Savings Bonds.

--Peter
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I think you missed the point of my post. I am looking for some filed documentation that would indicate that this interest was in fact from US Savings bonds which is exempt from state income tax.

I don't know if the Form 1041 commonly uses e filing (like the 1040 Form) where descriptions and attached schedules are lost in the data flow.
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I think you missed the point of my post. I am looking for some filed documentation that would indicate that this interest was in fact from US Savings bonds which is exempt from state income tax.

I don't know if the Form 1041 commonly uses e filing (like the 1040 Form) where descriptions and attached schedules are lost in the data flow.


I think you missed the point. E-filing doesn't remove descriptions and attached schedules. They are part of the e-file transmission. In the case of US Government interest, it is not separately reported in the 1040 e-file transmission since it isn't reported separately on the paper Form 1040 or Schedule B. The same is true for Form 1041. However, when there is an associated state e-file transmission with the federal 1040 (or 1041) the portion of interest due to US Government bonds, etc. is part of the state e-file data since it is part of the state paper return.

The state K-1 equivalent is where you show the adjustment. Whether it is reported directly as US Government interest or as an adjustment to the federal-reported interest is up to the specific state.

Ira
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I think you missed the point of my post. I am looking for some filed documentation that would indicate that this interest was in fact from US Savings bonds which is exempt from state income tax.

No, I didn't. The filed documentation is at the state level, not the federal. You file the documentation of US Government interest with your state return.

--Peter
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I sure did...it didn't sink in about having a state equivalent 1041 or state equivalent 1041 K-1. Substantially all of the income is US Government interest and I was thinking that since no state tax will be due there would be no need to file a state equivalent 1041. The state equivalent 1041 will still have to be filed to reconcile out from the Federal 1041 income. Thanks Peter and Ira.

You guys are just to smart for me!!
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The state equivalent 1041 will still have to be filed to reconcile out from the Federal 1041 income.

I miss my memory.

Are the state K-1s filed for the estate's state or for the state of the beneficiaries?
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"Are the state K-1s filed for the estate's state or for the state of the beneficiaries?"

I thought about that also. Two of the beneficiaries are in the same state as the estate. Two others are in different states with state income taxes. I'm in Texas with no state income tax.

I wonder if the beneficiaries in states outside that of the estate just use the information to roll data into their own state income tax return. Or do the beneficiaries in states outside that of the estate have to file a non resident state income tax return for the estate's domiciled state.
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I wonder if the beneficiaries in states outside that of the estate just use the information to roll data into their own state income tax return. Or do the beneficiaries in states outside that of the estate have to file a non resident state income tax return for the estate's domiciled state.

I went through this last year. The system that has the files is dead. Before completing the final return for the estate this year, the files will need to be extracted from the backup.

I believe that the state K-1's are filed in the estate's state, and out of state beneficiaries have to deal with their state taxes on tax exempt interest. Doesn't box 14 of the federal K-1 have codes for tax exempt interest and net investment income?
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Are the state K-1s filed for the estate's state or for the state of the beneficiaries?

State K-1s are based on the resident state of the Estate, not the beneficiaries. The beneficiaries will need to figure out on their own what to do, or ask the executor of the Estate for more information.

Ira
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