Estate and Trust Tax Preparation

Estate and Trust Tax Preparation

I can assist you in preparing tax returns for estates and trusts.

Estates and Trusts tax returns are prepared using IRS Form 1041 – U.S. Income Tax Return for Estates and Trusts. As the executor, you may be required to file an estate or trust income tax return.

There are two kinds of taxes owed by an estate: One on the transfer of assets from the decedent to their beneficiaries and heirs (the estate tax), and another on income generated by assets of the decedent’s estate (the income tax).

When someone dies, their assets become property of their estate. Any income those assets generate is also part of the estate and may trigger the requirement to file an estate income tax return. Examples of assets that would generate income to the decedent’s estate include savings accounts, CDs, stocks, bonds, mutual funds and rental property. IRS Form 1041-U.S. Income Tax Return for Estates and Trusts, is required if the estate generates more than $600 in annual gross income. The decedent and their estate are separate taxable entities. Before filing Form 1041, you will need to obtain a tax ID number for the estate. An estate’s tax ID number is called an “employer identification number,” or EIN.

A decedent’s estate figures its gross income in much the same manner as an individual. Most deductions and credits allowed to individuals are also allowed to estates and trusts. However, there is one major distinction. A trust or decedent’s estate is allowed an income distribution deduction for distributions to beneficiaries. Income distributions are reported to beneficiaries and the IRS on Schedules K-1 (Form 1041).

Don’t confuse the estate income tax return (Form 1041) which is for income and other tax items of the decedent before the estate is settled. The estate tax return (Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return) is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death. Currently, the 2015 federal estate tax exemption is $5.43 million.

Trusts – In general, a trust is a relationship in which one person holds title to property, subject to an obligation to keep or use the property for the benefit of another. The fiduciary (or one of the joint fiduciaries) must file Form 1041 for a domestic trust taxable under section 641 that has:

  1. Any taxable income for the tax year,
  2. Gross income of $600 or more (regardless of taxable income), or
  3. A beneficiary who is a nonresident alien.