Updated for Tax Year 2018
Form 1041 is used to report income taxes for both trusts and estates. That is different than the estate tax return which is Form 706. For estate purposes, Form 1041 is used to track the income an estate earns after the estate owner passes away and before any of the beneficiaries receive their designated assets.
Not every estate is required to file Form 1041 for income earned. If the estate has no income producing assets or the annual gross income is less than $600, no return is necessary. The only exception is if one of the beneficiaries is a nonresident alien. In that case, the income total does not matter, and a return must be filed. The executor or personal representative of the estate must file the return.
Who pays the income tax for estates?
The estate itself is not responsible for paying income taxes if it’s assets are distributed to the beneficiaries before it earns income. The beneficiaries are then responsible to pay any tax due on that amount. Each beneficiary will receive Schedule K-1 which tells them the amount and type of income to report on their individual tax returns (1040).
Estate Tax Year
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 December 15 of the same year. Before the assets were passed on to the beneficiaries, they earned $1,200. That 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
To file Form 1041, the executor needs to obtain a taxpayer identification number (TIN) for the estate. This can be done easily on the IRS website.
It is important to gather all of 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
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.
Form 1041 is also used to report any income a trust earns over $600. Like the estate, however, Form 1041 must be filed regardless of the amount of income earned if there is a beneficiary that is a nonresident alien.
Simple vs. Complex
Trusts are usually classified as simple or complex. Simple trusts must distribute all of the income earned to its beneficiaries and cannot accrue income. Simple trusts also cannot designate a charity as its beneficiary or distribute its corpus (principal).