The Internal Revenue Service’s Form 1041 is just one of many federal forms that look slightly different after passage of the 2017 Tax Cuts and Jobs Act (TCJA). With the calendar year rapidly coming to a close, now is the time to learn the new mandates ushered in by Form 1041 and how you can use it for your clients.
There are several details about Form 1041 that tax pros need to be aware of, says tax attorney Arthur Werner, including compliance with the Affordable Care Act and distributable net income. Werner covers these critical elements and others in his webinar for Eli Financial, “How to Prepare Form 1041 After the Tax Cuts and Jobs Act of 2017.”
Schedule K-1 Determines Who Pays—Estate or Beneficiaries
Form 1041 is “used to report income taxes for both trusts and estates,” the IRS explains. “For estate purposes, Form 1041 is used to track the income an estate earns after the estate owner passes away and before any of the beneficiaries receive their designated assets.”
Not every estate needs to file: If the filer in question has no income-producing assets or an annual gross income of less than $600, then you get a pass as long as none of the beneficiaries are non-resident aliens.
When it comes time to writing a check, the estate itself is not responsible for paying taxes if assets are distributed to beneficiaries before an income is earned—then it’s the beneficiaries who must pony up; for more specifics, see the Schedule K-1 instruction sheet.
Either way, the IRS cautions, it’s important to keep in mind that the estate tax year is not always the same as the traditional calendar or tax year.
“Typically, the estate calendar year starts on the day of the estate owner’s death and ends on Dec. 31 of the same year,” the IRS notes in its Tax Act blog. “The executor, however, can file an election to choose a fiscal year, which means the tax year ends on the last day of the month before the one-year anniversary of death. The executor then has up to 12 months to file the income tax return. The estate tax return is generally due four months after the close of the tax year.”
There are a handful of common deductions that can be claimed for estates. They include:
- The standard $600 exemption
- Executor fees
- Professional frees
- Administrative costs (such as court filing fees)
- Required distributions to beneficiaries
Track Estate to See If It Has Income
One key detail is this: Income must go to the estate in order to be reported on Form 1041, says The Balance.
This is important “because not everything a decedent owned will become part of his estate,” writes attorney Julie Garber for The Balance. “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.”
Tip: You may need to peek at the beneficiary’s return to make sure interest was reported.
Yet another key detail to be aware of is income in respect of a decedent (IRD), says Werner. Income that arrives before a death is reported on the decedent’s final tax return, which is separate from Form 1041 and must be filed by the estate’s executor.
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