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If you were a beneficiary of an estate or trust in 2011, the estate or trust will have to file its own income tax return on Form 1041. Then, each beneficiary's share of income, deductions, credits and other tax items is reported on a Schedule K-1. One copy of each K-1 is filed with the estate or trust's income tax return, and each beneficiary receives a copy of his or her own K-1.
If you receive a K-1 from an estate or trust, don't file it with your tax return. Instead, each item that is separately stated on the K-1 is transferred to the appropriate section of your own Form 1040. For example, Line 1 on the K-1, "Interest income," should be transferred to Line 1, Part I, of your own Schedule B.
For the average trust, most items on the K-1 consist of interest, dividends, and capital gains and will be transferred to your Schedule B and/or Schedule D. However, if the trust operates a business or some rental real estate, income from these activities will be reported on Part III of your Schedule E, Supplemental Income and Loss.
The K-1 form contains line-by-line instructions as to exactly where on your tax form each item must be reported. If you disagree with the treatment or amount of any item, you'll need to take it up with the trustee or other fiduciary who prepared the K-1s, and ask them to change their treatment on the copy filed with the IRS. If you can't reach an agreement, you can file IRS Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request, to explain the discrepancy.
Note that the amounts reported to you on the K-1 may be different from the amounts you actually received. If the trust instrument requires that the beneficiaries be paid all current income, each beneficiary will be taxed on his or her own share, whether or not he or she has actually received it (for example, if there is a time lag and the fiduciary did not pay the income over until after the tax returns were filed).