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3 Tips for Filling Out Form 1041, Income Tax Return for Trusts and Estates

Posted on: January 27th, 2017
trust income reportingVirtually all estates and most trusts require filing of the Form 1041 to report income earned by the estate and/or trust. 

The Form 1041 is mandatory for all estates and certain trusts with gross incomes of $600 or more for the tax year, or with nonresident alien beneficiaries. Learn more about income-producing assets in estates and trusts.

A trustee or executor might need to find counsel who can assist with preparing and filing the Form 1041. Tax filing errors, and their symptomatic delays and fines, can be prevented with careful tax preparation. 

Our tax attorneys routinely assist trustees and executors with preparing the Form 1041. From these experiences we noticed that certain issues surfaced more frequently than others. Review these tips before filing:
  1. Acquire Tax Identification Numbers. Some trusts require an EIN (employee identification number) for ongoing administration (bank accounts, brokerage accounts, etc.). The EIN is used on the trust’s income tax return. Additionally, the IRS recognizes the decedent and the estate as separate taxable entities. Executors must request a separate EIN for the estate if there is a probate estate. 
  2. Know the differences. Inexperienced trustees and executors confuse the Form 1040 and the Form 1041. These documents are not the same. The Form 1040 is used to report individual income tax, while the Form 1041 reports trust and estate income tax. Another mistake: Confusing the Form 1041 tax return with the estate tax return (Form 706). An error could cause penalties for the party filing the forms. Take prudent action in advance to identify appropriate forms, including by retaining experienced probate counsel who can help to identify which returns are required.
  3. File additional required forms. Depending on the estate or trust, the filing of additional federal forms may be necessary. Review the Form 1041 with a tax attorney who is experienced with tax returns for trusts and estates. For instance, if the trustee has been replaced since the prior tax year, a Form 56 is needed. This document notifies the Internal Revenue Service (IRS) of the termination and formation of fiduciary relationships. If the estate or trust had foreign interests, investment income or expenses, gifts, or assets subject to additional taxes (fuel, luxury, ship, etc.), additional forms must be completed and filed.

Special note for executors: As of July 31, 2015 a new form is mandatory for all estates required to file estate tax returns. The Form 8971 can be confusing to navigate. Please review our tax attorney’s post Form 8971 Guidance for Executors.
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