What Is IRS Form 1041?

IRS Form 1041 Explained

Dice spelling out the word "TAX" sitting on top of a tax return
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IRS Form 1041 is an income tax return filed by a decedent's estate or living trust after their death. It's similar to a return that an individual or business would file. It reports income, capital gains, deductions, and losses, but it's subject to somewhat different rules than those that apply to living individuals.

An estate can earn income from the interest of investments that haven't yet been transferred to beneficiaries, or from salary earned but not yet received by the deceased. This must all be reported to the IRS.

Income generated by assets after they're transferred to a beneficiary is taxed on the beneficiary's personal tax return.

What Is IRS Form 1041?

An estate can owe an estate tax, an income tax, or both. IRS Form 1041 reports only income earned by an estate from the time of the decedent's death until the estate closes. That income can be offset by deductions and capital losses. Income received before the decedent's date of death is reported on the decedent's final tax return—a separate document that must also be filed by the estate's executor.

IRS Form 1041

Who Uses Form 1041?

The executor or personal representative of an estate must file Form 1041 when income goes to the estate, and this can be an important distinction. Not everything a decedent owned will become part of their estate. A bank or investment account with a payable-on-death designation would go directly to the named beneficiary. The executor would not report this income on the estate's tax return.

The same rule applies to trusts—an asset producing income must be held and owned by the trust for that income to be taxable to it. The trustee of a living trust must file Form 1041 under Section 641 of the Internal Revenue Code if it's a domestic trust and has any taxable income for the tax year.

In most cases, trusts are either simple or complex. A simple trust must distribute income to beneficiaries as it's received. It's not permitted to retain or give bequests from its principal or corpus—the property with which it was originally funded. Capital gains and losses stay with the trust and can't be transferred to beneficiaries because they're considered part of the corpus.

Where to Get Form 1041

The IRS provides an interactive Form 1041 on its website. You can enter the required information, save the completed form to your hard drive, and print out a copy.

Form 1041 includes some schedules directly on the return, but Schedule D isn't one of them. An interactive version of this schedule is also available on the IRS website.

How to Fill Out and Read Form 1041

Income earned by the estate or trust is reported on lines 1 through 9 of the 1041 tax return, depending on the nature of the income. Deductions appear on lines 10 through 22. Lines 23 through 30 of the 1041 tax return totals any income tax due and reports payments made.

The trust or estate can take deductions for any amounts that are transferred to beneficiaries, and an executor can deduct their fee and administrative costs that are incurred in settling the estate. These might include expert fees paid from the estate's income, such as for the assistance of an attorney or an appraiser.

Each beneficiary who receives a distribution from the estate or trust should be issued a Schedule K-1 at the end of the tax year, detailing the amount and type of any income received from the estate. The beneficiary would then report this income on their own tax return. The trust or estate can take the deduction for the total amount of these K-1s by submitting Schedule B along with Form 1041.

Discretionary distributions from the corpus of an estate and trust—those that are left up to the trustee or the executor but not required under the terms of the last will or the trust documents—are not reported on Schedules K-1 and they're not deductible.

Use Schedule D to report gains and losses associated with the sale of any assets. Sales can occur when an estate must liquidate property to raise the cash necessary to settle the decedent's debts. Schedule D must be submitted with Form 1041.

Can Form 1041 Be E-Filed?

The IRS has accepted electronically filed 1041 forms since January 2014. You can also e-file amended Forms 1041, and the IRS e-file platform accepts supporting schedules as well.

You can't later mail in associated schedules if you've e-filed Form 1041, and the IRS e-file platform only accepts returns for the current and previous two tax years.

Where to Mail Form 1041

The mailing address for a paper copy of Form 1041 and its schedules depends on the state in which the estate is located and whether you're also sending a check or money order for any taxes due. The IRS provides a list of addresses for Forms 1041 on its website.

Requirements for Filing Form 1041

The executor or personal representative of an estate must file Form 1041 when a domestic estate has gross income during the tax year of $600 or more. A 1041 tax return must also be filed if one or more of the estate's beneficiaries are nonresident aliens even if it earned less than $600.

Grantor trusts and estates must apply for employer identification numbers (EINs) to file their tax returns because these entities can no longer use the Social Security numbers of their creators after their deaths. Irrevocable trusts are their own tax entity and should already have EINs.

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 doesn't cover more than 12 months. Most estates begin their tax years on the date of death and end them on December 31 of that year, but the executor or trustee can opt to use a fiscal year instead.

The estate's tax year would end on the last day of the month preceding the first anniversary of the decedent's death.

Form 1041 is due to the Internal Revenue Service within four months of the close of the tax year in most cases. Irrevocable trusts are their own tax entity and should already have EINs.

Keep in mind that these rules apply only to federal taxation. Individual 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.

Key Takeaways

  • A decedent’s estate or living trust must pay income taxes, and income and deductions are reported on the Form 1041 tax return.
  • Only income earned from the time of the decedent’s death until bequests are made is reported on Form 1041.
  • Form 1041 can be e-filed for deaths that occur in the current or past two tax years.
  • Form 1041 is a federal tax return. State returns can differ.