IRS Income Tax Form 1041 for Estates and Trusts
Trusts and estates must pay income taxes when they earn at least $600
IRS Form 1041 is an income tax return, the same as an individual or business would file but for a decedent's estate or living trust after his death. The return reports income, capital gains, deductions, and losses, but subject to somewhat different rules than those that apply to living individuals.
What Is an Estate's Gross Income?
An estate can earn income in the form of interest from investments that have not yet been transferred to beneficiaries, or salary earned but not yet received by the deceased by his date of death.
Income received before the date of death is reported on the decedent's final tax return—a separate document that must also be filed by the executor of his estate. Income generated by assets after they're transferred to a beneficiary is taxed on the beneficiary's personal tax return.
Income must go to the estate to be reported on Form 1041. It can be an important distinction because 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 therefore not count interest earned by this account as income.
The beneficiary would have to report the interest on her tax return, however.
Which Estates Must File IRS Form 1041?
The executor or personal representative of an estate must file Form 1041 when a domestic estate has gross income for the tax year of $600 or more or when one or more of its beneficiaries are nonresident aliens. In this case, the estate would have to file a return even if it earned less than $600.
Which Trusts Must File IRS Form 1041?
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 it or to give bequests from its principal or corpus—the property with which it was originally funded. Capital gains and losses, therefore, stay with the trust. They can't be transferred to beneficiaries because they're considered part of the corpus.
The same rule applies to trusts as to estates—an asset producing income must be held and owned by it for that income to be taxable to the trust. Taxes associated with income generated after the asset is passed to a beneficiary would be the responsibility of the beneficiary.
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 if it has any taxable income for the tax year, gross income of $600 or more regardless of the amount of taxable income or a beneficiary who is a nonresident alien.
Allowable Deductions for Trusts and Estates
Executors and trustees can take certain deductions from income when they're preparing the tax return.
That automatic $600 deduction applies for the tax exemption. The trust or estate can take deductions for any amounts transferred to beneficiaries, and the executor of an estate can also deduct her fee and administrative costs 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.
An Estate's or Trust's Tax Year
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.
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. In this case, the tax year would end on the last day of the month preceding the one year anniversary of the decedent's death.
In most cases, Forms 1041 are due to the Internal Revenue Service within four months of the close of the tax year.
Form 1041 Instructions
Some trusts already have taxpayer identification numbers (TINs), but others report income and losses on the grantor's personal tax return during his lifetime. These are called grantor trusts, and they're different from irrevocable trusts.
Grantor trusts and estates should apply to the IRS for their own TINs after the death of the grantor or, in the case of an estate, the testator. These entities can no longer use the Social Security numbers of their creators after their deaths. The TIN will be necessary to open bank accounts in the trust's name and to file Form 1041.
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. The schedule details the amount and type of any income she received from the estate. The beneficiary would then report this income on her own tax return. The trust or estate can take the deduction for the total amount of these K-1s by preparing and 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 are not required under the terms of a last will and testament or 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. It might occur when an estate must liquidate property to raise cash to settle the decedent's debts. Schedule D must also be submitted with the Form 1041.
State Laws May Be Different
Keep in mind that 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.
Department of the Treasury: Internal Revenue Service. "2018 Instructions for Form 1041 and Schedules A, B, G, J, and K-1," Page 5. Accessed Nov. 18, 2019.
Department of the Treasury: Internal Revenue Service. "2018 Instructions for Form 1041 and Schedules A, B, G, J, and K-1," Page 17. Accessed Nov. 18, 2019.
Internal Revenue Code. "§ 641. Imposition of Tax," Page 21. Accessed Nov. 18, 2019.
IRS. "Frequently Asked Questions on Estate Taxes," Accessed Nov. 18, 2019.
Department of the Treasury: Internal Revenue Service. "2018 Instructions for Form 1041 and Schedules A, B, G, J, and K-1," Page 8. Accessed Nov. 18, 2019.
Department of the Treasury: Internal Revenue Service. "2018 Instructions for Form 1041 and Schedules A, B, G, J, and K-1," Page 18-36. Accessed Nov. 14, 2019.
Department of the Treasury: Internal Revenue Service. "2018 Instructions for Form 1041 and Schedules A, B, G, J, and K-1," Page 28. Accessed Nov. 18, 2019.
Department of the Treasury: Internal Revenue Service. "2018 Instructions for Form 1041 and Schedules A, B, G, J, and K-1," Page 37. Accessed Nov. 18, 2019.
Department of the Treasury: Internal Revenue Service. "2018 Instructions for Schedule D (Form 1041)," Page 1. Accessed Nov. 18, 2019.