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The assets you leave behind will continue generating profit before they’re transferred to your estate’s heirs and beneficiaries. The trust’s or estate’s executor must report this income to the IRS on Form 1041, US Income Tax Return for Estates and Trusts.
The fiduciary you name in your will must complete this form to account for any income or capital gains, deductions, and losses the estate or trust sustains from the moment you die until the assets are passed on to beneficiaries.
The rules for filing IRS Form 1041 and Form 1040 are slightly different, so sometimes, determining when or who should file this form can take time and effort.
Our comprehensive guide to trust and estate taxes will help you understand when to use Form 1041 and what types of income you must report on it.
Table of Contents
The purpose of IRS Form 1041
The instructions for Form IRS 1041 document reveal that the fiduciary of the decedent’s trust, estate, or bankruptcy estate must use the form to report:
- The income that is either accumulated or held for future distribution or currently distributed to the beneficiaries.
- All estate’s or trust’s income tax liabilities.
- Employment taxes on wages paid to household employees.
- Trust’s or estate’s income, losses, gains, and deductions.
- Net Investment Income Tax.
The fiduciary must report all taxable income a trust or an estate generates from the moment of the decedent’s death until the property held in an estate or a trust is transferred to beneficiaries on this form.
For instance, if a decedent rented a property or made an investment that continued to generate profit for the estate or trust after their death, the fiduciary must file Form 1041.
On the other hand, any wages or income the decedent earned before death should be reported on their final tax return filed by the fiduciary.
Understanding Form 1041 Schedules
The form contains Schedules A, B, and G, which the estate’s executor must fill out under certain conditions.
The executor must fill out the form’s Schedule A if a portion of the estate’s or trust’s gross income was gifted as a charitable contribution to a qualifying organization. Trustees may also have to file Form 1041-A to report trust accumulation of charitable amounts.
Schedule B of Form 1041 refers to income distribution deduction. This section of the form should be completed:
‘If the estate or trust was required to distribute income currently or if it paid, credited, or was required to distribute any other amounts to beneficiaries during the tax year.‘
It’s also worth adding that trusts with multiple beneficiaries with separate and independent shares must treat them as different trusts to determine their distributable net income.
The fiduciary must use Form 1041 Schedule I to calculate the distributable net income and the income distribution deduction.
Schedule G contains Tax Computation and Payments sections that allow you to calculate the estate’s or trust’s taxable income based on the tax rate schedule featured in the form’s instructions.
The Payments section lets you compute estimated tax payments made on Form 1041-ES and tax payments allocated to beneficiaries on Form 1041-T.
Beneficiaries should receive Schedule K-1 Form 1041 from the estate or trust that lists their share of the income, credits, and deductions if they receive a distribution after the decedent’s death and before the assets are transferred to them.
Filing Requirements
Trustees and estate executioners must file Form 1041 if a trust or estate they represent generates more than $600 of AGI annually. However, filing this form is compulsory if one of the beneficiaries is a nonresident alien, even if an estate or trust doesn’t generate income.
This form doesn’t include the income created by assets that go directly to the beneficiary, such as investment accounts with the payable-on-death designation.
Hence, fiduciaries only have to report income generated by assets held by estates or trusts.
Estates
The decedent’s estate contains all assets in their name at the time of their death, minus any tax debt they might have. Besides the decedent’s estate, Form 1041 can also be used by bankruptcy estates under Chapters 7 and 11.
Trusts
Usually, Trustees who file Form 1041 represent simple or complex trusts. However, the form can also be used by fiduciaries of qualified disability trusts, irrevocable trusts, grantor-type trusts, and electing small business trusts to report income.
Common trust funds and Charitable Remainder Trusts don’t have to file Form 1041.
Filing Deadlines
Form 1041 is due by the fifteenth day of the fourth month after the close of the trust’s or estate’s tax year. In most cases, the estate’s tax year, for Form 1041, starts from the day of the decedent’s death and ends on December 31 of the same year.
Fiduciary can elect to file the form at the end of a fiscal year, in which case they must file it a month before the decedent’s death anniversary.
As a result, most fiduciaries file Form 1041 before the current tax year’s filing deadline, April 15, or the following workday.
Trusts and estates paying estimated taxes for the income generated after the decedent’s death must complete these payments by the end of each quarter.
Completing IRS Form 1041
The IRS updates Form 1041 and Form 1041-ES instructions annually, so you must read the instruction booklet before filling out these forms. Moreover, you should collect all documents and information needed to complete the form before you start working on it.
The Estate’s and Fiduciary’s Details
The first part of the form collects information about the estate or trust and the fiduciary.
You may have to apply for the Employer Identification Number if the trust or estate you’re representing doesn’t already have one. You can’t use the decedent’s SSN or TIN to complete this section of the form.
You’ll also have to specify the type of estate or trust, list its name, and provide your (fiduciary’s) address and contact details. The form preparer must indicate the number of Schedule K1 forms attached if the estate or trust releases distributions to beneficiaries.
A fiduciary must declare if the estate or trust made a Section 645 election that allows estates and trusts to be treated as a single entity for tax purposes. You must file Form 8855 to make this election.
Income
The income an estate or trust makes from dividends, royalties, business income or loses, capital gains or losses, farming activities, or other revenue sources should be reported in this section of Form 1041.
Filers must attach Form 1040 Schedule E for income earned from rents, royalties, partnerships, or other estates and trusts and other tax forms depending on the estate’s or trust’s income type.
This section has nine rows, and you must enter the correct amount on each applicable line and combine these values on Line 9.
Deductions
The steps you must take to complete this section of the form depend on several factors, including the other forms you include in your submission. You can use this section to claim the charitable deduction, fiduciary and attorney fees, or net operating loss deductions.
Remember that you must complete the form’s Schedule B and attach Schedule K-1 if beneficiaries received distributions from the estate or trust.
Tax and Payments
Schedule G worksheet contains information and instructions you must use to determine the trust’s or estate’s tax liability. Besides calculating the total tax and total payment with Schedule G, you’ll also need information from Form 965-A to complete this section.
If the estate overpaid taxes, it can transfer the excess amount to the next year or receive it as a tax refund.
The form preparer, in most cases the trustee, the estate’s executive, or an officer representing the fiduciary, should sign and date the return and disclose if they agree to discuss the return with the IRS.
Frequently Asked Questions
Form 1041 is a federal tax form, and you may have to pay state taxes for any income an estate or trust generates after the decedent’s death.
You can make changes to IRS Form 1041 after you file it using tax software or by completing a new Form 1041 and mailing it to the IRS.
Fliers who cannot file Form 1041 before the deadline can complete Form 7004 to get an automatic 5-month filing extension.
Estate and trust fiduciaries must continue to file Form 1041 every year until the assets are transferred to beneficiaries.
Reporting Estate and Trust Income with IRS Form 1041
Failing to name a fiduciary and not considering the income tax aspect of the assets you leave behind are common estate planning mistakes.
The assets in your estate or trust can generate profit after your death, and the person representing the trust or the estate must report that income to the IRS.
Filing IRS Form 1041 involves dealing with extensive paperwork and checking the most recent instructions on how to file the form.
Hence, the person tasked with representing the estate during the probate period or the trust’s lifetime should be familiar with these regulations so that your loved ones don’t have to deal with the complexities of filing an income tax return for trusts and estates.
Author:
Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.
