What is the Form for?
Losing a loved one is a difficult and sorrowful experience. The grief of loss is also accompanied by a variety of other responsibilities such as travel plans, funeral arrangements, and burial. On top of that, there are often financial decisions and requirements which must be handled in a timely and organized manner. Even after death, an income tax return must be submitted for the decedent.
Who files this form?
If a deceased person owned an estate or financial trust, a special form is required for filing of the income tax return. Form 1041 is used for filing U.S. income tax returns on estates held in trust for future distribution among beneficiaries of the deceased citizen. In addition, Form 1041 may also be used to report gains, losses, or income tax liabilities for the estate or trust.
While a trust or decedent’s finances are accounted in much the same way as an individual tax return, there is one major distinction regarding the decedent’s income tax calculations. The difference is that a trust or estate belonging to a deceased person may receive a tax deduction based upon distributions to beneficiaries.
How to Prepare the Form?
As you consider a tax return regarding estates and trusts, it is helpful to understand some of the terms that govern Form 1041. All of these items will be reported through the tax return process. First, the term beneficiary refers to any heir for the deceased or any other person determined to receive some form of inheritance according to the will. Second, most often, people think of a home or other property as an estate, but the IRS considers the estate to be any entity or group charged with overseeing the assets, debts, and expenses for the deceased person. A third term to know is Distributable Net Income or DNI. The DNI includes tax deductions allowable because of income that is distributed to beneficiaries.
The IRS regards income from an estate or trust as being income in respect of a decedent, or IRD. According to the IRS, examples of income in respect of a decedent are:
- Income of a deceased person who used the cash method accounting method,
-Income gained only because of the death, and who used the accrual method of accounting, and
-Income for which the deceased person had a right to claim at the time of prior to his or her death.
Who Files this Form?
Form1041 should be filed for any year in which the estate’s income rises over $600 or if the beneficiary of the estate is a nonresident alien in the United States. Similarly, Form 1041 should be filed in any case for which a trust earns taxable income in a year, or if the gross income rises over $600 in the year. As with estates, trusts must also file the tax return if the beneficiary is a nonresident alien in the U.S.
Regarding the particular person required to actually complete and file Form 1041, the executor is the first option. The person appointed as executor is responsible for the entire life of the estate or trust. If you are preparing to appoint an executor, it is best to select a person neutral to other parties who will work to ensure the decedent’s wishes for the use of funds are kept. In the absence of an executor, a trustee representing the estate/trust may file Form 1041.
Other Related Documents
Form 1041-A, U.S. Information Return Trust Accumulation of Charitable Amounts,