If you’re designated the executor of someone’s estate, you may need to file Form 1041 to declare the income from that person’s estate (or hire someone to fill out the form for you). Form 1041 isn’t a substitute for Form 1040, though. Confused? We don’t blame you. A financial advisor can help you maximize an estate plan for your loved ones. Let’s walk through IRS Form 1041, the U.S. Income Tax Return for Estates and Trusts.
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In the year of a person’s death, he or she leaves both personal income and, in some cases, estate income. That’s why the person dealing with the estate of a deceased person will have to file personal income taxes for the deceased and, potentially, estate income taxes, too. If the estate that a person leaves behind has income sources, that income will be reported on Form 1041.
What are some examples? Maybe the estate includes a property that’s being rented out and so brings in rental income. Or maybe the estate owns stocks that pay dividends. If you’re the executor of an estate that has $600 or more of income or has a beneficiary who is a resident alien, you must file Form 1041. If the estate is distributed to beneficiaries before it can take in $600 or more of income, and none of those beneficiaries are resident aliens, filing Form 1041 is not necessary.
The most common reason for needing to file Form 1041 is to declare income from a decedent’s estate, but you should also use the form to declare income from a simple trust, a complex trust, a qualified disability trust, an Electing Small Business Trust (S portion only), a grantor type trust, a Chapter 7 bankruptcy estate, a Chapter 11 bankruptcy estate or a pooled income fund. If you’re unsure about the tax liabilities for your trust, ask the lawyer who helped you set up the trust for advice.
It’s normal for tax accountants to take on the task of filing this form since it’s pretty complicated. But just in case you decide you want to fill it out yourself or you want to understand what your accountant is doing, let’s walk through how to fill out Form 1041. If you need to file Form 1041, you’ll need to gather information about the trust or estate income you’re reporting.
At the top of the form, you’ll enter the type of estate or trust in question, the Employer Identification Number (you can apply for one of these online), and other information such as the name of the estate or trust and the name and address of its fiduciary (the person responsible for its assets on behalf of the beneficiaries).
The next section of Form 1041 covers the income of the estate or trust. It’s where you declare income from things like interest, dividends, capital gains and more. For some kinds of income, you’ll have to attach other supporting tax forms as indicated. Add up all forms of income you’ve listed and write the sum on Line 9.
Once you’ve declared the income of the estate or trust, you’ll enter deductions. Just like with personal income taxes, deductions reduce the taxable income of the estate or trust, indirectly reducing the tax bill. On Form 1041, you can claim deductions for expenses such as attorney, accountant and return preparer fees, fiduciary fees and itemized deductions.
After the section on deductions is complete you’ll get to the kicker – taxes and payments. You’ll subtract deductions from income and then use Schedule G of Form 1041 to calculate the tax owed. You can then subtract any tax payments that have already been made or withheld, any penalty owed (if applicable) or the amount overpaid (if applicable). If you overpaid, you can opt to have the money you overpaid credited to next year’s tax return or refunded to you. Then you (or your paid preparer) will sign and date the form.
The second page of Form 1041 provides detailed instructions for calculating charitable deductions and income distribution deductions (if applicable), as well as instructions on tax computation. The bottom section of page two is a series of yes-or-no questions about the income sources and business dealings of the estate or trust. If you’re not sure about the answers to these questions, don’t guess.
Even estates too small to trigger the estate tax can be large enough to create significant paperwork. And if the estate has income, that will need to be reported on Form 1041. If you’re the executor of an estate, it may fall on you to fill out – or hire someone else to fill out – Form 1041. Before you get started preparing the form it’s a good idea to gather all the relevant documentation for the estate or trust. That way, you won’t have to keep starting and stopping while you look for more information that will help you give the IRS what it needs.
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Amelia JosephsonAmelia Josephson is a writer passionate about covering financial literacy topics. Her areas of expertise include retirement and home buying. Amelia's work has appeared across the web, including on AOL, CBS News and The Simple Dollar. She holds degrees from Columbia and Oxford. Originally from Alaska, Amelia now calls Brooklyn home.
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