Generally speaking, a trust or decedent’s estate is a separate entity under the Internal Revenue Code—just like a person or a business. Therefore, a trust or estate must file its own version of a tax return. One of the forms used to file this return is Form 1041.
How do you know whether you need to file Form 1041? And how do you file one? Here’s everything you need to know about IRS Form 1041.
What is IRS Form 1041?
IRS Form 1041 is basically an income tax return for an estate or trust.
When someone dies, he or she leaves behind personal income or maybe even estate income. The person who is left in charge of the deceased person’s estate will have to file personal income taxes on the deceased person’s behalf, and potentially estate income taxes. If the estate has a source of income, then this income must be reported on Form 1041.
For example, if a deceased person’s property is being rented out to tenants, then it is bringing in rental income. Or, the estate could earn an income through stocks or dividends. If you’re the executor of an estate that has more than $600 in income, then you must file Form 1041. You must also file Form 1041 if you’re the executor of an estate that has a beneficiary who is not a United States citizen.
If an estate has income from sources outside the US that is not connected to the conduct of a US trade or business, and is not able to be included in gross income, then that estate is a foreign estate and it does not need to file the IRS Form 1041.
It’s important to note that not everything a deceased person owned will become part of his or her estate. For example, a bank or investment account that has a payable-on-death designation will go directly to a beneficiary. The beneficiary must report this income on their individual tax return, but this does not need to be filed on Form 1041.
You can also use Form 1041 to declare income for a domestic trust. A trust is a domestic trust if a U.S. court is able to exercise primary supervision over its administration, and U.S. persons have the authority to control all substantial decisions of the trust. Applicable domestic trusts include:
- Simple trust
- Complex trust
- Qualified disability trust
- Electing small business trust (S portion only)
- Grantor trust
- Chapter 7 bankruptcy trust
- Chapter 11 bankruptcy estate
- Pooled income fund
Under certain circumstances, certain trusts (known as Qualified Revocable Trusts) may elect to be treated as part of an estate. If this occurs, and you are the executor of an estate, it will be your responsibility to file the IRS Form 1041 for the estate and all electing trusts. If you are the trustee of the electing trust, and there is no executor for the estate, then the responsibility of filing the IRS Form 1041 falls on you.
If there is more than one trustee involved, then the trustees must decide on who will be the filing trustee. The persons who are not responsible for filing the IRS Form 1041 are still responsible for timely providing the information necessary to file the form.
Note: Form 1041 is not the same document as the estate tax return, which is Form 706.
How to File Form 1041
To file Form 1041, you’ll need to compile information about the estate or trust you’re reporting. Some of the information you may need to include are:
- Employer Identification Number (you can apply for one online)
- Name of the estate/trust
- Address of the fiduciary
The second section of Form 1041 covers the income of the estate/trust. You’ll declare income from:
- Capital gains
Add up all the forms and write the sum on Line 9. You may have to attach some additional tax forms for some types of income.
Now comes the Form 1041 estate deductions and trust deductions. On Form 1041, you can claim deductions for some expenses, including:
- Attorney fees
- Account and tax preparer fees
- Fiduciary fees
- Itemized deductions
When you’ve claimed your deductions, you’ll subtract then from the income and use Schedule G to calculate the tax owed. Then you can subtract any tax payments that have already been made or withheld, penalties owed, and amount overpaid. If you overpaid, then you can opt to have the overpaid money credited for the next year’s tax return.
The second page of Form 1041 has information that will help you calculate deductions and owed taxes. The bottom part of the page has yes-or-no questions about your estate/trust’s income sources and business dealings. Consult with a tax professional if you need help answering them.
Estate Tax Year
It’s important to note that the estate tax year is not always the same as the traditional tax year. Typically, the estate tax year starts on the day of the estate owner’s death. It ends on December 31 of the same year. If you’re the executor, you can file an election to choose a fiscal year—which would make the estate tax year start on the last day of the month before the one-year anniversary of the death. You’ll have up to 12 months to file the income tax return, and you’ll generally have about four months to file the estate tax return after the close of the tax year.
Yes, this can get very complicated—that’s why tax professionals are so often enlisted to assist with Form 1040.
K-1 for Beneficiaries
The estate/trust must issue a Schedule K-1 to each beneficiary that receives money from it. Schedule K-1 basically summarizes the amount of money being dispersed to each beneficiary. The estate/trust can deduct the sum of all K-1 forms on Schedule B, which should be submitted with Form 1041.
Need Help with Form 1041?
Tax professionals are commonly enlisted to tackle Form 1041 because it’s one of the more complex tax forms. Don’t hesitate to contact a qualified tax professional if you need assistance filing IRS Form 1041.