Estate Income Tax Preparation

Form 1041 ? U.S. Income Tax Return for Estates and Trusts is the income tax return used to report income to an estate.  This is different from the United States Estate (and Generation-Skipping Transfer) Tax Return (Form 706) which is not generally required for small estates.

When an estate is created, the estate usually needs to apply for an EIN (tax ID number) with the IRS.  This number is required to open up a bank account and should also be provided to any financial or brokerage institution that the deceased had an account with.   Any income received subsequent to the date of death should be reported to the IRS under that ID number.

Because income is reported to the IRS under the estate?s EIN number, the IRS is likely to send a letter to the personal representative if Form 1041 is not filed requesting the return.  The IRS generally does not know that there is no taxable income unless you file a 1041 showing that there is no tax due.   It is also possible that the estate may have taxable income (or distributable income) which is not apparent until the tax return is filed.

There are also three potential benefits to the beneficiaries of an estate to filing Form 1041 even if one is not required.   First, excess deductions to the estate in the final year may be tax deductible to the beneficiaries of the estate.   For example, if deductible legal, accountant, and other fees are not needed to offset the estate?s income in the final year, the beneficiary may be able to take those deductions on his/her personal return if he/she itemizes deductions.     Second, filing of the 1041 and the associated K-1?s can help the beneficiary establish basis in the assets transferred from the estate.  Finally, beneficiaries may be able to benefit from excess capital losses.