income tax prep for Trusts and estates
A trust or a decedent’s estate is a separate legal entity for federal tax purposes. A decedent’s estate comes into existence at the time of death of an individual. A trust may be created during an individual’s life (inter vivos) or at the time of his or her death under a will (testamentary). If the trust instrument contains certain provisions, the person creating the trust (grantor) is treated as the owner of the trust’s assets.
A trust or 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. In addition, a trust or decedent’s estate is allowed an income distribution deduction for distributions to beneficiaries.
To figure this deduction, the fiduciary must complete schedule B. The income distribution deduction determines the amount of any distributions taxed to the beneficiaries.
The beneficiary, and not the trust or decedent’s estate, pays income tax on his or her distributive share of income. Schedule K-1 form 1041 is used to notify the beneficiaries of the amounts to be included on their income tax returns.
Before preparing Form 1041, the fiduciary must figure the accounting income of the estate or trust under the will or trust instrument and applicable law to determine the amount, if any, of income that is required to be distributed.
Who Must File
Decedent’s Estate
The fiduciary must file Form 1041 for a domestic estate that has
Gross income for the tax year of $600 or more, or
A beneficiary who is a nonresident alien.
An estate is a domestic estate if it isn’t a foreign estate. A foreign estate is one the income of which is from sources outside the United States that isn’t effectively connected with the conduct of a US trade or business and isn’t includible in gross income. If you are the fiduciary of a foreign estate, file Form 1040NR US Nonresident Alient Income Tax Return instead of Form 1041.
Trust
The fiduciary must file Form 1041 for a domestic trust taxable under section 641 that has
Any taxable income for the tax year
Gross income of $600 or more, or
A beneficiary who is a nonresident alien.
When to File
For calendar year estates and trusts, file Form 1041 and Schedule K-1 by April 15. For fiscal year estates and trusts, file Form 1041 by the 15th day of the 4th month following the close of the tax year.
If more time is needed to file the estate or trust return, use Form 7004 Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns to apply for an automatic 5.5 month extension of time to file.
Contact Tax Attorney Abtin Barzin for help with your trust accounting and tax preparation needs. (949) 584-2578