If you’re the personal representative for someone who is recently deceased, you may need to file Form 1041, Income Tax Return for Estates and Trusts, for their estate.
However, not every estate requires an estate tax return. Sometimes, all you need to do as a personal representative is make sure an individual income tax return is filed for the year of death.
Here’s how to determine if you need to file an estate tax return on Form 1041.
There are four different tax returns you may need to file after the death of an individual:
Form 1040, U.S. Individual Income Tax Return.
After a person dies, a personal representative must file an income tax return covering the period from January 1 through the date of the person’s death.
If the person was married, the surviving spouse can file jointly with the deceased person for the year of death. The representative should also file for any previous years, if necessary.
Form 1041, U.S. Income Tax Return for Estates and Trusts.
This is commonly known as an estate income tax return. It covers income and other tax items for the estate of the deceased. However, tt should not be confused with an estate tax return.
Form 706, U.S. Estate Tax Return.
Unless the estate is substantial, you may not need to file this return. Form 706 is required if the gross estate at the time of the individual’s death exceeds $5.43 million (in tax year 2015) or in order to pass any unused exclusion amount to the surviving spouse.
Form 709, U.S. Gift Tax Return.
This is another form you may not need to file. Form 709 is required if the deceased person made a taxable gift before death for which they did not file a gift tax return.
As the personal representative of an estate, you must file Form 1041 for the estate if it has more than $600 in income for the year or if one of the beneficiaries of the estate is a nonresident alien.
Income of the estate includes, but is not limited to: interest, dividends, salary the deceased person earned but didn’t receive until after death, and any rent money received.
The sooner you distribute estate assets the less likely they are to generate income for the estate. If estate assets are jointly held and, therefore pass directly to the surviving spouse, they don’t generate income for the estate.
Filing the estate income tax return
The tax year for the estate begins on the day of the person’s death. If you are the legal representative of the estate, you have the option to file the estate’s income tax return at any time during the twelve months following the death.
The only requirement being the tax period must end on the last day of the month you choose to file. If you choose to file the return prior to the twelfth calendar month, the estate is then considered to have a fiscal tax year.
In order to continue the filing process, you first need a taxpayer identification number (TIN) for the estate, which you can apply for on the IRS web site.
After you obtain the estates TIN, following TaxAct’s easy, step-by-step guidance makes filing an estate income tax return simple.
TaxAct will prompt you to enter the estate’s income, such as rents, dividends and interest received. Additionally, the software will ask if there are any deductible expenses, including:
- Required income distributions to beneficiaries
- Executor’s fees
- Legal, accountant and other professional fees
- Administrative expenses
- Miscellaneous deductions, including office supplies and investment advice. (The estate can only deduct miscellaneous deductions to the extent they exceed 2 percent of adjusted gross income.)
Information about each beneficiary to whom the estate may be passing income will also need to be reported.
By inputting beneficiary information, TaxAct will prepare a Schedule K-1 for each beneficiary, which documents the income they received and can be used for their own tax return purposes.
By preparing a Schedule K-1, the estate can then report a deduction for the income amount on its Form 1041 to ensure the income is only taxed once.
Wrapping it up
After you finish preparing Form 1041, be sure to file by the tax return deadline (April 18, 2016 or April 19, 2016 for residents of Maine or Mass.).
If the estate has a fiscal tax year, the deadline to file is the 15th day of the fourth month following the close of the tax year.
Also, be sure to pay any tax due from the estate assets and distribute Schedule K-1 to the beneficiaries showing their share of distributions.