Where does an accumulation distribution go?April 28, 2015 - Phil HodgenTax and Trusts
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
Accumulation distribution number – where does it go?
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.
Offloading the hard work – meta
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.
Offloading the hard work – doing the work
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.
- Calculate the accumulation distribution using the default method by following the “paint by the numbers” system in Form 3520, Part III, Schedule A. That result goes on Line 37.
- Answer the question on Line 38. You will need it later.
- Now hop down the page a bit to Form 3520, Part III, Schedule C. Here is where you see the tax computation happen for the accumulation distribution.
- The number from Line 37 (the accumulation distribution that the taxpayer is deemed to have received under the default method) goes onto Line 48.
- Next . . . pull out your Form 4970 and do the tax computations on that. Then come back to Form 3520 and write the number on Line 49. Funny, huh? Form 1040 offloads the hard work to Form 3520, which in turn offloads the hard work to Form 4970.
- Line 50 is the same number as Line 38. (Little insight: if you look at a tax form, it is like a really dumb software algorithm on paper.)
- Line 51 is found in the Instructions to Form 3520. There is a table that tells you the interest rate to apply, based on the age of the trust. Note: when the trust is 18 years old, the tax on the accumulation distribution will carry a 2X interest charge. In other words, if your tax on the accumulation distribution is $100, the interest charge will be $200.
- Line 52 is where you calculate the interest charge.
- Line 53 is the sum of the income tax on your accumulation distribution and the interest charge on the income tax. It is this number that gets ported over to your Form 1040, at Line 62. Write “additional tax” on Line 62 to tell the IRS.