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Your Complete Guide to Filing Form 1041, U.S. Income Tax Return for Estates and Trusts

Your Complete Guide to Filing Form 1041 - TaxAct

IRS Form 1041 is an income tax return for estates and trusts, similar to Form 1040 for individuals.

If you are the executor for an estate, you may be required to file Form 1041 – U.S. Income Tax Return for Estates and Trusts.

Form 1041 must be filed for the person who died in addition to any personal income tax return you need to file on his or her behalf.

For example, say an unmarried person died on June 30. As the executor, you file a final personal tax return for that person for the first half of the year.

After death, everything that person owned becomes part of his or her estate. You file Form 1041 for the estate for the remainder of the year.

Don’t confuse the Form 1041 income tax return for the estate, and an estate tax return.

The income tax return is for income and other tax items on an estate before it is settled.

For example, say a person has a rental property and money in a bank savings account. After the person dies, rental income received and interest earned on the savings account are both income to the estate.

An estate tax return, on the other hand, is used to calculate estate tax.

Estate tax is a tax on money in the estate, before it is transferred to heirs.

For 2014, the estate tax only applies to estate of over $5.34 million – meaning it’s not an issue for most of us.

Do you need to file Form 1041 for an estate?

If you’re an executor for an estate, you may need to file Form 1041 for the estate if one of these conditions is true:

  • The estate had gross income for the tax year of $600 or more, or
  • The estate had one or more beneficiaries who are nonresident aliens.

What is included in estate income?

Any income that would have belonged to the deceased person or that is earned by assets in the estate is considered estate income.

Common examples of estate income include rents from real estate in the estate, salary that wasn’t paid to the deceased person before death, or interest on an estate bank account.

Can you avoid filing an estate return?

With an uncomplicated estate, it may be possible to avoid filing an estate return.

The key to avoiding an estate return is preplanning.

If you can keep the estate income under $600, you will not have to file an estate return.

Before a person dies, it’s important to make sure everything is in order.

For example, if a rental house is intended to go to the surviving spouse, it should be held in joint tenancy. That way, when one spouse dies, the property immediately goes to the other spouse.

Any rental income then becomes income to the surviving spouse – not the estate.

After the date of death, the more quickly you distribute estate assets to heirs, the less income the estate is likely to earn.

What you should know for filing Form 1041

You can’t always distribute estate assets as quickly as you would like. It’s not unusual for an estate to take one year or longer to be settled, even without major complications. In that case, you may need to file Form 1041.

Here are some things you’ll need to know:

  1. You’ll need some simple information in order to prepare your Estates and Trusts return. Quickly gather everything you need using this free tax return checklist from TaxAct.
  2. You’ll need to get a taxpayer identification number (TIN). Every estate needs a taxpayer identification number (TIN), just as a person needs a social security number.You can get a TIN online in minutes using the IRS website. Don’t be confused when the online application refers to an “Employer Identification Number.” You’re not an employer, but the process of applying for an identifying number for an employer or an estate is the same.
  3. The estate tax year. The estate tax year is not likely to be the same as a calendar year. The estate tax year begins on the date of death and ends on the last day of a month. You can file the estate’s first income tax return at any time up to 12 months after the date of death.

Allowable exemption and deductions on an estate income tax return.

The following items reduce estate taxable income:

  • A $600 exemption.
  • Distributions you are required to make to beneficiaries (but not discretionary distributions).
  • Executor’s fees, if the estate pays you for your services. You report the amount you receive on your tax return.
  • Professional fees, including amounts you pay to attorneys, accountants, and tax preparers.
  • Administrative expenses, such as court filing fees.
  • Miscellaneous deductions to the extent they exceed two percent of the estate’s adjusted gross income. Miscellaneous deductions for an estate include investment advice, safe deposit box rentals, office supplies, postage, and travel expenses.

Do not deduct the deceased person’s medical or funeral expenses on Form 1041.

Schedule K-1 for Beneficiaries

In addition to Form 1041, you may need to file Schedule K-1 if you are required to distribute income to beneficiaries.

Schedule K-1 shows each beneficiary how much he or she received during the tax year. It does not include amounts the beneficiary received at the discretion of the executor.

The TaxAct program automatically creates Schedule K-1s for you.

You must attach all copies of Schedule K-1 to Form 1041 when you file.

What kinds of trusts require someone to file Form 1041?

You generally must file Form 1041 if are a trustee for a domestic trust, and that trust has gross income of $600 or more for the year.

You also must file if the trust has any taxable income (gross income less deductions), or if the trust has one or more beneficiaries who are nonresident aliens.

Some common types of trust are simple trusts, complex trusts, qualified revocable trusts (QRTs), grantor type trusts, charitable remainder trusts, and pooled income funds.

Form 1041 is not used for a common trust fund held at a bank.

TaxAct Estates & Trusts (Form 1041) maximizes all the deductions you are entitled to from estate and trust expenses. Just answer simple questions and TaxAct does the work for you. Start free now or sign into your TaxAct Account.
About Sally Herigstad

Sally Herigstad is a certified public accountant and personal finance columnist and author of Help! I Can't Pay My Bills, Surviving a Financial Crisis (St. Martin's Griffin). She writes regularly at CreditCards.com, Bankrate.com, Interest.com, RedPlum, and MSN Money. She is an experienced speaker and a member of Toastmasters International. Follow Sally on Twitter.