IRS Form 1041 is used to report income for trusts and estates. For estates, the form is specifically designated to record income the estate earns after the estate's owner dies but before the distribution of assets to any beneficiaries. This is separate from a form 706 estate tax return.
The fiduciary of a decedent’s estate, trust, or bankruptcy proceeding files the 1041 to report the following:
- Income, deductions, gains, and losses of the estate or trust.
- Income that is accumulated, held for distribution, or currently being distributed to beneficiaries.
- Income tax liability of the estate or trust.
- Employment taxes paid to household employees.
When Is the Form Necessary?
Form 1041 must be filed in the following circumstances:
- The estate has an annual gross income over $600, or
- One of the beneficiaries is a non-resident alien, no matter how little income the assets produce.
- The 1041 is also required for trusts that earn over $600 or have a non-resident alien beneficiary.
Suppose the assets are allocated to the beneficiaries before it earns income. In that case, they will receive a Schedule K-1 advising them of the amount and type of income to report on their individual tax forms. In that case, the estate would not owe taxes on the income.
Not all assets become part of an estate; some go directly to the inheritor, such as a bank account with a named beneficiary. Any income from this account would not belong on Form 1041. Instead, the recipient would report it on their personal tax return.
Who Files a 1041?
The executor of an estate is responsible for filing form 1041. The form is often called a fiduciary return for that reason. A fiduciary is defined as:
An individual in whom another has placed the utmost trust and confidence to manage and protect property or money. The relationship wherein one person has an obligation to act for another's benefit.
An executor (or a trustee, in the case of a trust) always has a fiduciary responsibility to the deceased and, in turn, to the estate. The 1041 is filed with the Taxpayer Identification Number (TIN) of the estate and reports income, gains, and losses, as well as using any available deductions.
Deductions from the estate’s income can include these:
- $600 exemption
- Distributions to beneficiaries, using Schedule B
- Executor’s fees, if any (which would then be taxable income to the executor).
- Expert fees (payments to accountants, attorneys, and tax preparers)
- Charitable contributions
- State and local taxes
- Miscellaneous deductions like investment advice, office supplies, and travel expenses
How Does Form 1041 Apply To Trusts?
The trustee of a trust is responsible for filing form 1041 if a domestic trust has taxable income over $600 (or has a non-resident alien as a beneficiary). For an irrevocable trust, filings may be required during the grantor’s lifetime as well as after death. For a revocable trust, the trustee becomes responsible after the grantor dies, and the income no longer falls under the status of personal income to the grantor. At that time, the trust receives a separate taxpayer identification number for filing.
Executors can choose to file according to a calendar or fiscal year schedule.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.