Does Anyone Know About Estate Income Tax Return Form 1041

highrate | Oct 5, 2019 | 46 posts since 2016

I will have to fill out Form 1041 for an estate tax return at the end of the year. It is required for any decedent who has more than 600 dollars of income after death. It looks like this estate will have between 3 and 4 thousand of income in 2019. I usually do my own 1040 on turbotax and I called turbotax yesterday and they said the only turbotax product that allows 1041 is the business turbotax. I am not sure but it appears to me that the form 1041 is not real difficult and maybe I can just do it on paper and send it in. It also is my understanding, perhaps wrong, that income from the estate can be distributed to a beneficiary or beneficiaries and that serves as a deduction so the net income will be 0 and the estate doesnt pay any tax but then a K1 must be sent to the IRS so the beneficiary gets taxed. Does anyone have any experience with this? Am I correct with what I said about net income being zero? Is it doable to just do the 1041 on paper? Thanks

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Answers

CuriousDave | Oct 7, 2019 | 233 posts since 2018

Your are right - Form 1041 appears on its face to be really simple to prepare. It is not, and it really takes someone with expertise in fiduciary return preparation to prepare it properly. You will notice terms like "Distributable Net Income" or "DNI" and "amounts required to be distributed." These are very technical terms that require specialized knowledge of fiduciary accounting and taxes. What makes forms 1041 especially tricky is the fact that if there is taxable income left, the marginal tax rates are very compressed, and it takes (for 2018 returns) only $12,501 in taxable income to reach the top federal marginal rate of 37%, and there may be a state fiduciary income return and tax required as well. An estate or trust with taxable income of $3,000 has (for 2018 returns) a federal tax liability of $363. On $5,000 it would be $843. In addition to getting the numbers right, there are special elections that may be available that may provide tax savings which are difficult to fathom without adequate grounding in fiduciary return preparation. As for distributions, that all depends on whether the will allows the executor (you?) to make distributions from trust income before the estate is wound up completely. If it does, you may be able to distribute out all the income, but if the income includes capital gains (including long term capital gain distributions from mutual funds), those may have to remain in the estate and be taxed to the estate. Your best best is to see a tax pro, who may be prepared to briefly look at what you have and make recommendations to you, perhaps also recommend appropriate and inexpensive software.

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highrate | Oct 8, 2019 | 46 posts since 2016

Thanks for your response I now expect the total income to the estate will be about 1300 dollars, more than half that will be from a required rmd from an IRA. I hate to pay an accountant just to do that tax form. All of that income also will pass to me. There are other beneficiaries and they are getting fixed amounts and the remainder goes to me and I am the executor. My understanding is that I will personally pay the taxes on my tax form for that income since it will pass to me, and the estate will pay no tax, but I will have to make a K1 for myself and send it to the IRS

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MY2CENTSWORTH | Oct 8, 2019 | 436 posts since 2016

You mention a required RMD - who was/is required to take that RMD? Secondly, you describe income passing to you as Executor/Beneficiary - are you using the term "income" correctly or is it actually money being left to you as Beneficiary/Executor in the will? Your understanding in your original post pertaining to the $600 income is correct, but then you go on to say that the net income to the estate will be zero. If I understand this correctly, I think you may need additional information if you don't already have it about who actually received or will receive the RMD as well as the fact that an inheritance to a beneficiary is not normally taxable as income. There are some sticky rules regarding beneficiaries and IRA's so I would encourage you to look into those details before making a mistake that cannot be undone.

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highrate | Oct 8, 2019 | 46 posts since 2016

the small ira had no beneficiary so the check was made out to the estate. NO income tax was withheld. I said all the proceeds will go to me. There are also some dividends that were put in his bank account electronically after he passed. My understanding is that when all the non taxed income is passed to me, I will produce a K1 for myself and then I pay tax on it. THe estate needs pay no tax since the income will all be distributed to me

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111 | Oct 9, 2019 | 672 posts since 2019

Regarding just the "small IRA" - you stated that there was no designated beneficiary listed, so it was made out to the estate. When that happens, IRS rules dictate that the account has to be fully distributed within 5 years (specifically, I believe you have until 12/31 of the fifth year). In other words, there's no possibility of creating a "stretch IRA" where the annual RMD would be based on the beneficiary's lifespan.

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highrate | Oct 9, 2019 | 46 posts since 2016

this IRA was paid to the estate as a lump sum so there is no more in the ira. The lump sum was about 700 dollars which by itself necessitates a 1041 being filled out since the estate got more than 600 dollar

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thowellIII | Oct 9, 2019 | 89 posts since 2015

I completed a 1041 that had a few pieces and found it relatively easy, albeit time consuming. I did also have to complete a K1 (which wasn't bad). I was not the beneficiary and the estate was precarious (between solvent and able to pass on property and insolvent and not being able to do what the decedent desired). I also had to go into some obscure portions of the law (about net operating losses, because the decedent owned rental property).

I had the benefit of time--I knew what was going to be on the income tax return and was able to work on it over an extended period of time.

I also was able to use the resources that the Internal Revenue Service provides and spoke with some specialists with the IRS to address a few questions.

To be clear: I am somebody who doesn't mind figuring out and solving problems and who had the flexibility and time to devote to the matter. In the end, I do think that my efforts worked out well for all involved (even though I took no compensation for my time or effort, but I was making the wishes of a relative come true after death). I guess my only regret is that the beneficiary of the estate did not maximize the value of the net operating loss carry-forward (which I did point out), but that was a more complex point.

One possibility: You could start working on the return and see how difficult it is and whether you are able to get the answers you need from IRS help lines. (Working outside of normal filing season helps, presuming that the staffing levels have not been cut so much that there is not any possibility to get assistance.) You can then determine if it is worth your time and effort to finish the process.

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highrate | Oct 9, 2019 | 46 posts since 2016

thank you. That is a good idea. I think I will try to print out the forms and the instructions as well as a 1041 K1 and preliminarily fill them out. They won't be due till next year but as you point out the IRS will be less busy now and more apt to be able to answer questions. I know the amount of the IRA distribution to the estate. There's only one more possible source of income that I know about and that I will try to find out about and find the appropriate place on the form and also find out about the distributions.

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highrate | Oct 15, 2019 | 46 posts since 2016

I called the irs today about filling out form 1041. After being transferred twice, I was told that they no longer provide support on this other than what's on their website

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GH1 | Oct 15, 2019 | 1,054 posts since 2017

Thats great we wont offer any guidance. When you mess up be prepared for penalties

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thowellIII | Oct 16, 2019 | 89 posts since 2015

That's unfortunate. The budget cuts at the IRS have undermined both customer service and enforcement.

And the more I think about it, the more I think "unfortunate" is an understatement. There are elements of tax law that are challenging to understand but, once one understand them, they are not too difficult to follow. The opacity of the law undermines public trust while pushing people to rely on (often expensive) private providers of information that interprets what is the public law.

I understand that not every law can be simplified to the point that most people can comprehend them with minimal effort. But if a country is not willing to provide the support, it is essentially encouraging cynicism on the part of citizen.

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highrate | Oct 17, 2019 | 46 posts since 2016

I agree with you.
Tax Act has an estate and trust edition for 69.95. I think I will use that but the 2019 edition is not available yet. It is much cheaper than turbotax which is 139.99

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