Updated for Tax Year 2021
As the beneficiary of an estate or trust, figuring out all the tax implications and 1041 form filing requirements can be daunting. Accurately reporting income made from trusts and estates is essential when it comes to tax preparation, so we’ve included some Form 1041 instructions and tips for you below.
What is a 1041 form?
Form 1041 is used to report income taxes for both trusts and estates (not to be confused with Form 706, used when filing an estate tax return). For estate tax purposes, IRS Form 1041 is used to track the income an estate earns after the estate owner passes away but before any of the beneficiaries receive their designated assets.
First, let’s look at some common questions about Form 1041 filing requirements for a decedent’s estate.
How much do you have to make to file a 1041 form?
Not every estate is required to file Form 1041 for the income it earns. No return is necessary if the estate has no income-producing assets or its annual gross income is less than $600. The only exception is if one of the grantor’s beneficiaries is a nonresident alien. In that case, the estate’s income total does not matter, and a federal tax return must be filed. The executor or personal representative of the estate must file the estate tax return using Form 706.
Do you have to file Form 1041 if there is no income?
You do not have to file Form 1041 if the estate generates no taxable income unless one of the beneficiaries is a nonresident alien.
Who has to file Form 1041?
The fiduciary of the estate or trust files Form 1041 to report any income tax liability of the estate or trust, as well as any income, deductions, gains, losses, or employment taxes on wages.
Different forms are required to report different types of income. For example, Schedule D is used to report capital gains and losses, while Schedule K-1 reports a beneficiary’s share of income.
Who pays the income tax for estates?
The estate itself is not responsible for paying income taxes if its assets are distributed to the beneficiaries before earning income. In this case, the beneficiaries are responsible for paying any tax due on that amount. Each beneficiary will receive a Schedule K-1 Form 1041, which tells them the amount and type of income to report on their individual tax returns (Form 1040).
When is the due date for Form 1041?
There is an important distinction regarding the timeline of filing Form 1041: The estate tax year is not always the same as the traditional calendar tax year.
Typically, the estate calendar year starts on the day of the estate owner’s death and ends on Dec. 31 of the same year. The executor, however, can file an election to choose a fiscal year, which means the tax year ends on the last day of the month before the one-year anniversary of death. The executor then has up to 12 months to file the income tax return. The estate tax return is generally due four months after the close of the tax year.
Here’s an example: Joe passed away on June 1, and his executor distributed all of the estate’s assets by Dec. 15 of the same year. Before the assets were passed on to the beneficiaries, they earned $1,200. This is greater than the $600 exemption, which means the estate must file an income tax return. In this instance, the tax year starts on June 1 (date of death) and ends on Dec. 31 of that year unless the executor elects a fiscal year. If a fiscal year is chosen, the tax year ends on May 31 of the following year.
Taxpayer Identification Number
The estate is its own taxable entity. In order to file IRS Form 1041, the executor needs to obtain a taxpayer identification number (TIN) for the estate. This can be done easily on the IRS website.
Form 1041 deductions
It is important to gather all the financial documents necessary to support the tax deductions you want to claim on Form 1041. Here is a short list of common deductions and exemptions that lower the estate’s taxable income:
- $600 exemption
- Executor fees (deductible if the estate pays the executor for their services)
- Professional fees (i.e., lawyer and accountant costs)
- Administrative expenses (i.e., court filing fees)
- Required distributions to beneficiaries
When claiming deductions or tax credits, take note that you may also have to file Schedule I, which is used to figure alternative minimum tax for estates and trusts.
Schedule K-1 for beneficiaries
The estate must send out Schedule K-1 to all beneficiaries reporting any asset distributions they received. The beneficiaries will refer to Schedule K-1 for the income amount they should report from the estate on their personal income tax return, Form 1040.
The income requirements for trusts are very similar to the rules for estates. IRS Form 1041 is used to report any income a trust earns over $600. Like the estate, Form 1041 must be filed regardless of the amount of income earned if a beneficiary is classified as a nonresident alien.
Simple vs. complex trusts
Trusts are usually classified as simple or complex. Simple trusts must distribute all income earned to its beneficiaries and cannot accrue income. Simple trusts also cannot designate a charity as its beneficiary or distribute its corpus (principal).
Complex trusts refer to any trust that does not qualify as a simple trust. These trusts offer greater flexibility than simple trusts, especially when dealing with large estates or the added complication of several beneficiaries.