IRS Form 1041: Income Tax Return for Estates and Trusts

When an Estate or Trust Must File IRS Form 1041

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IRS Form 1041 is the tax return used by estates and trusts when they earn income during the tax year. It's not the same as an estate tax return -- that's Form 706. IRS Form 1041 is an income tax return, just as an individual or business would file but for income earned by a decedent's estate or living trust after his death. 

The official name of Form 1041 is U.S. Income Tax Return for Estates and Trusts.

An estate or trust can use December 31 as its tax year end date, or it can use any other month as long as that first year does not cover more than 12 months. 

Which Estates Must File IRS Form 1041? 

According to the instructions for IRS Form 1041, the following rules apply to estates. The executor or personal representative must file this tax return for a domestic estate that has:

  1. Gross income for the tax year of $600 or more, or
  2. A beneficiary who is a nonresident alien.

Income might come in the form of interest from investments that have not yet been transferred to a beneficiary, or salary earned but not received by the deceased before his death.

The income must go to the estate. Not everything a decedent owned will become part of his estate. A bank or investment account with a payable-on-death designation would go directly to the named beneficiary. The estate would not count interest earned by it as income, and IRS Form 1041 would not be required if the estate had no other sources of income.

However, the beneficiary would have to report the interest on his tax return. 

Which Trusts Must File IRS Form 1041? 

The trustee of a living trust must file this income tax return under section 641 of the Internal Revenue Code if it's a domestic trust and it has: 

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

The same rule applies -- an asset producing income must be held and owned by the trust for that income to be taxable to the trust. Income generated after the asset is passed to a beneficiary would be the responsibility of the beneficiary. 

Other Rules for IRS Form 1041 

Executors and trustees can take certain deductions from the estate or trust income when preparing the tax return. An automatic $600 deduction applies, and if the estate or trust retained ownership of the asset but transferred its income to a beneficiary, the tax burden shifts to the beneficiary. The trust or estate can take a deduction for the amount transferred. The executor of an estate can also deduct her fee for settling the estate, as well as administrative costs of running the estate and any expert fees paid, such as for the assistance of an attorney, from the estate's income 

Visit the IRS forms webpage for the most recent version of Form 1041. Historical versions of the form can be found on the prior year products web page.

These rules apply only to federal taxation. States have their procedures and laws, so check with a local accountant or tax attorney to find out if your estate or trust must pay income taxes at the state level as well.

 

Also Known As Estate & Trust Income Tax Return

NOTE: Tax laws change periodically, and you should consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and is not a substitute for tax advice.