This is for those of you who are wrestling with accumulations distributions and how to transport numbers from Form 3520 to Form 1040. If you want a full write-up, look at my earlier blog post, Calculate tax on distributions from foreign trusts using the default method
I had two queries in two days from people about Line 37 — where does this number go? That means it is time for a blog post.
We are talking about Form 3520. Specifically, go look at Part III, Schedule A, Line 37. This is where you calculate income tax using the default method for trust distributions to U.S. beneficiaries.
Line 37 yields a calculated number that is the portion of the current distribution that is treated — under the default method — as being an accumulation distribution.
My two questions asked where, on Form 1040, this number goes. The answer is a bit weird, but not that weird. It does not go on Form 1040.
The accumulation distribution, although it is income, does not go on Form 1040, your income tax return. Instead, it gets processed — run through the sausage machine that is Form 3520 plus Form 4970 — and then the tax computed in that way is transported to Form 1040, Line 62.
This is kind of weird, that you would have an income item that does not go onto Form 1040 for computing the tax. But, in fact, this is something that is done all the time, purely in the interests of keeping Form 1040 itself as simple as possible.
PFIC calculations are exactly the same. When you have an excess distribution from a PFIC, the tax on that excess distribution is computed elsewhere, and the final tax number is ported over to Form 1040. The hard work is offloaded to Form 8621.
Somewhat similar: computing the self-employment tax. Yes, this could be done on Form 1040 but in order to keep Form 1040 to two pages, the computations have been offloaded to Schedule SE.
Here is what you do, once you have computed the accumulation distribution under the default method. This is a line-by-line description of what is happening (and why) in Form 3520, Part III, Schedule C.