As a tax preparer, you may end up filing taxes for a trustee or representative of an estate. To successfully report all their income, you must help them file Form 1041, U.S. Income Tax Return for Estates and Trusts.
What is Form 1041?
Form 1041 declares any taxable income that an estate or trust generated after the decedent passed away and before designated assets were transferred to beneficiaries. Schedule K-1 (Form 1041) Beneficiary’s Share of Income, Deductions, Credits, Etc. is an informational tax form that shows the beneficiary’s share of an estate or trust. The share may include income, credits, deductions, and profits. This form shows the pass-through of tax responsibility from the estate or trust to the person or entity that benefits from it.
Who receives Form 1041?
If your client is a trust or estate, help them file Form 1041. Then, help them fill out a separate Schedule K-1 for each trustee or beneficiary and send it to them. All beneficiaries receiving Distributable Net Income (DNI) must be sent a Schedule K-1 to report on their tax return.
Form 1041 filing requirements
An estate or trust must complete Form 1041 to report their income and deductions. Form 1041 shows that the trust or estate is passing the obligation of taxes to the estate’s beneficiary. If the estate is not producing income or its annual gross income is less than $600, then it does not have to file a Schedule K-1 but may still be required to file Form 1041. One exception to this rule is that if a beneficiary is a nonresident alien, they must file Form 1041, regardless of the income amount.
A trust or estate would then report each trustee’s or beneficiary’s share of income on individual Schedule K-1s.
When is the tax year for estates?
Sometimes, the estate tax year can vary from the calendar year. The estate calendar year usually begins on the day of the owner’s passing and ends on December 31 of that same year, even if this period is not 365 days. However, the executor can petition to have the tax year end on the last day of the month before the estate owner’s first anniversary of death. This gives the executor 12 months to file the return.
Who pays the income tax for estates or trusts?
The beneficiaries are responsible for paying income tax on the income distributed to them by the estate. They are only responsible for paying taxes on the income distributed to them consistent with the income distribution deduction, not the whole amount. If there are multiple beneficiaries, each beneficiary will typically receive a Schedule K-1 to report on their tax return, depending on the terms of the trust agreement or will. The estate itself should only pay taxes if it has no beneficiaries receiving assets before the estate earns income.
When is Form 1041 due?
Form 1041 is typically due by April 15 or the 15th day of the fourth month after the end of the tax year.
As a preparer, you can file this form electronically with TaxSlayer Pro.
How to lower an estate’s taxable income
If your clients see how much they owe in taxes from Form 1041, they might ask you as their preparer to help them strategize how to lower the estate’s taxes. There are a few deductions for some items related to estates. They include:
- Required distributions to beneficiaries
- Professional fees from a lawyer or accountant
- Court filing fees
- Executor fees if the estate is paying the bill
