When do beneficiaries report income from trust distributions made under the 65-day election rule?

The 65-day rule (Section 663(b) election) creates some confusion because of the timing difference, but here's how it works: The beneficiary reports the income in the tax year they actually receive the distribution, not the year the trust is treating it for tax purposes. So in your example, if you receive a distribution on February 15, 2023, you would report this on your 2023 tax return, even though the trust is reporting it on its 2022 return. The Section 663(b) election only affects the trust's reporting and doesn't change when the beneficiary received the money for tax purposes. This is one of those situations where the tax treatment isn't symmetrical between the trust and beneficiary. The trust gets the benefit of the deduction in the earlier year, but the beneficiary's tax recognition follows the actual receipt date.

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Just to share some additional insight on this topic - I'm a beneficiary of a trust that regularly uses the 65-day election. My understanding from speaking with our trust administrator is that while the trust reports these distributions on the prior year's return, beneficiaries report the income in the year they actually receive it. However, there's an important nuance: you need to understand the character of the income being distributed. If the distribution represents income that was already taxable to the trust in the prior year (like accumulated income), then the timing of your reporting might be affected. The K-1 you receive should clarify this, but it's often confusing since the K-1 will reference the trust's tax year.

I had this exact issue last year with a family trust. I received a distribution on February 28, 2022 that the trust counted toward their 2021 taxes using the 65-day rule. My tax preparer initially included it on my 2021 return, but after researching further, we amended to report it on my 2022 return instead, since that's when I actually received the money. The key document that clarified this for us was the explanation of the Section 663(b) election in IRS Publication 559. It specifies that the election only affects the trust's deduction timing, not the beneficiary's income recognition. The beneficiary includes the amount in income for the year in which it's received.