What this line means
Your share of nonpassive income from estates and trusts — income from activities in which you materially participate or that are classified as nonpassive by their nature (portfolio income distributed as part of the estate’s or trust’s ordinary income). This includes the beneficiary’s share of business income from an estate or trust where the beneficiary materially participates in the underlying activity.
Does this apply to you?
- You receive income from a trust that operates a business in which you actively participate
- An estate distributes income from a nonpassive trade or business to you
- You receive ordinary income from a trust that is classified as nonpassive on the K-1
- You materially participate in the activities of a grantor trust
Easy to overlook
Grantor trust income is reported directly by the grantor If you are the grantor of a revocable trust and the trust is treated as a grantor trust, the income is reported directly on your tax return as if you earned it personally. The trust may or may not issue a K-1 — some grantor trusts report on a substitute W-2 or 1099. The income classification (passive vs. nonpassive) depends on your personal participation in the underlying activity, not the trust structure. 1 IRS Schedule K-1 (Form 1041) instructions — Nonpassive income
Nonpassive income from estates is fully taxable without passive loss offset Nonpassive income cannot be offset by suspended passive losses from other activities. If you receive $20,000 in nonpassive income from an estate and have $20,000 in suspended passive losses elsewhere, the two do not net against each other. The nonpassive income is fully taxable, and the passive losses remain suspended. Only passive income absorbs passive losses. 2 IRS Schedule E instructions — Line 34b
Watch out for this
Confusing portfolio income (interest, dividends, capital gains) distributed by a trust with nonpassive business income. Portfolio income from a trust goes on Schedule B (interest), Schedule B (dividends), or Schedule D (capital gains) — not on Schedule E Part III. Only ordinary business income from the trust’s trade or business activities goes on line 34b.
Footnotes
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IRS Schedule K-1 (Form 1041) Instructions, Grantor Trust Reporting. https://www.irs.gov/instructions/i1041sk1 ↩
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IRS Schedule E (Form 1040) Instructions, Line 34b. https://www.irs.gov/instructions/i1040se ↩