The Vermont Department of Taxes has discovered an issue related to Form K-1VT-F that is causing some confusion among professional tax preparers.
The K-1VT-F created for the Vermont Fiduciary return has an issue with the state and local income tax addback on Line 4. There is no place on a beneficiaries' return to add this back into their Vermont income. The line is provided as informational only.
If a portion of the gross income remains in the trust/estate for any tax year, then the percentage of the income remaining in the estate should be applied to the state and local income taxes taken as a deduction on line 11 of the federal form 1041, and added back on the FIT-161, line 2c. The state and local income tax addback allocated to each K-1VT-F, together with the portion allocated at the trust/estate level, should add up to the state and local income taxes deducted on line 11 of the federal form 1041.
For example: ABC Trust has $10,000 in gross income. $2,500 (capital gains) remains in the trust, the rest is distributed via three K-1VT-Fs. $2,000 is taken as a deduction for state and local income taxes on the federal 1041, line 11. The percentage of income staying in the trust is $2,500 divided by $10,000 or 25%. 25% of the state and local income taxes deducted on line 11 of the federal form 1041 ($500) should be added back on the FIT-161, line 2c. 75% of the state and local income taxes ($1,500), would be divided up among the three K-1VT-Fs ($500 each) and reported on Line 4. Again, Line 4 is informational, the addback stops here.
