Form 4970 and Form 1041 Schedule J Accumulation Tax: Reporting Distributions From Foreign Trusts

The tax treatment of distributions to U.S. beneficiaries from foreign non-grantor trusts is particularly complex for tax advisers and compliance professionals. While foreign non-grantor trusts are not usually subject to U.S. income tax on non-U.S.-sourced or effectively connected income, U.S. beneficiaries are subject to income tax on distributions made out of the trust’s distributable net income (DNI).

IRC 643 provides that all income earned by a complex foreign non-grantor trust is considered as DNI. However, the throwback rules require that, unless current DNI is distributed within 65 days of the tax year’s end, the DNI must be reclassified as undistributed net income (UNI), rather than being treated as an addition to trust corpus.

U.S. beneficiaries receiving distributions from foreign trusts in excess of DNI in a given year must calculate and pay an “accumulation” or throwback tax, plus interest, on any portion of the distribution classified as UNI. This throwback tax is reported on Form 4970 and Schedule J of Form 1041 and involves difficult computations.

Tax advisers must have a thorough understanding of the throwback rules in reporting distributions from foreign non-grantor trusts to avoid costly consequences.

Listen as our expert panel provides practical guidance to reporting accumulation tax on foreign trust distributions from DNI and UNI on Form 4970 and Schedule J of Form 1041.

1. Default U.S. tax treatment of foreign non-grantor trusts with U.S. beneficiaries
2. Throwback tax rules on distributions from UNI to U.S. beneficiaries
3. Filing requirements and tax calculations
4. Calculated/reported on Form 1041 Schedule J
   1. Accumulation distributions
   2. Throwback years and ordinary income accumulation (Part II)
   3. Taxes on undistributed net income (Part III)
   4. Long-term capital gains alternative tax election
   5. Allocation to beneficiaries (Part IV)
5. Calculated/reported on Form 4970
   1. Income average and computation years (Part I)
   2. Calculating tax on accumulation distribution (Part II)
   3. Cross-referencing to Form 4970 and Form 1041
6. Other foreign reporting requirements

The panel will discuss these and other important topics:

• Identifying income that must be treated as UNI
• Calculating tax on distributions made out of UNI to a U.S. beneficiary on Form 4970 Part II
• Methodology for computing “throwback” taxes and reporting on Schedule J Part III
• Impact of electing alternative tax on long-term capital gains held by foreign trust

Learning Objectives

After completing this course, you will be able to:

• Determine how to calculate accumulation distributions out of UNI by foreign trusts on Schedule J
• Recognize how to calculate and report accumulation tax on UNI by foreign trusts on Form 4970
• Identify the tax impact of available elections to alter tax treatment of long-term capital gains in foreign non-grantor trusts

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience at mid-level within the organization, preparing complex tax returns and schedules, and supervising other tax preparers. The webinar presumes the attendee has foundational knowledge of international tax planning, and specific knowledge of US taxation of foreign trusts, domestic DNI calculations and trust taxation rules.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).