How to Allocate the Trust’s Withholding Credit to its Beneficiaries
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In last month's article, "Withholding When a Trust is on Title,” we mentioned if a trust distributes income to a beneficiary (for example the gain on the sale of California real estate), we require California Form 592, Resident and Nonresident Withholding Statement to allocate the related withholding credit from the trust to the beneficiary.
California R&TC Section 19002 states the amount withheld shall be allowed to the recipient of the income as a credit against the tax for the taxable year with respect to which the amount was withheld. This means that the withholding credit stays with the related income. If the trust includes the gain on the sale of California real estate in the income distribution deduction of California Form 541, California Fiduciary Income Tax Return, then the related withholding credit must also be distributed.
To allocate the withholding to the beneficiary, the trust completes Form 592. Form 592 provides us with the information we neede to apply the withholding credit to the beneficiary's account. At the same time, the trust provides California Form 592-B, Resident and Nonresident Withholding Tax, to the beneficiary. Form 592-B is used to report to the beneficiary the amount of income and withholding credit allocated by the trust (as reported by the trust on Form 592 to us). When the beneficiary files an income tax return, the beneficiary should attach Form 592-B to the income tax return to claim the withholding.
For instructions on how to complete Forms 592 and 592-B or to view the instructional webinar on completing Form 592, go to ftb.ca.gov and search withhold forms.
Before we conclude, here are a few tips and reminders to help you complete the Forms 592 and 592-B:
- The year of the form and the year of the withholding must be the same.
- Enter the trust information as the withholding agent. Even though the trust did not withhold, the trust has a withholding credit that must be allocated to its beneficiary.
- Enter the beneficiary's information as the payee. Do not enter the trust name in the payee field.
- If you are allocating a credit withheld by another entity on Form 592, the amounts entered on line 1 and line 5 should equal. This will result in a zero balance due on line 7.
- Complete Form 592-B with the beneficiary’s information as the payee in Part II. Enter the amount of income and withholding credit allocated to the beneficiary.
If you still have questions, we are here to help! Go to ftb.ca.gov and search trust withhold. You can also call us at 916.845.4900 or 888.792.4900. Our customer service team members are available to take your calls Monday through Friday, from 8 a.m. to 5 p.m., except state holidays.
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