Decedent's Estates

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Income Taxation of Decedent's Estates

A decedent’s estate is a separate legal entity for federal tax purposes. A decedent's estates comes into existence at the time of death of an individual. A 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. However, there is one major distinction. A 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.

For this reason, a decedent’s estate sometimes is referred to as a “pass-through” entity. The beneficiary, and not the 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 under the will and applicable local to determine the amount, if any, of income that is required to be distributed, because the income distribution deduction is based, in part, on that amount.


Form 1041 Decedent's Estates - General Information

  • Created automatically upon the death of the decedent
  • Separate entity from the decedent himself
  • Separate entity from the Estate Transfer Tax Return (706)
  • Exists from the date of death to the date of final distributions of the estate's assets
  • Life is generally 2 years or less, longer lives are uncommon
  • Can elect to deduct certain administrative expenses on Form 1041 for the Estate or Form 706 (Estate Transfer Tax Return) - election must be filed in duplicate with the return

Who Must File

Form 1041 - U.S. Income Tax Return for Estates and Trusts

  • Gross Income of $600 or more, OR
  • A nonresident alien beneficiary

When to File

  • 15th day of the 4th month after the end of the tax year
  • Extension: Form 2758, 3 months automatic. The extension can be extended for up to 6 months using Form 2758 after the first 3 month extension

Form 2758 has been replaced with Form 7004; which grants an automatic five-month extension for Estates and Trusts filing Form 1041.

Estimated Taxes

  • Estates do not pay estimates and do not calculate Form 2210 Underpayment Penalty for the first two years.
  • Section 643(g) Election to Allocate Estimates to Beneficiaries - An estate can make this election only in the final year of the estate

Amended Return

  • Check the Amended Return box on the front of Form 1041

Final Return

  • An estate is terminated when all assets have been distributed
  • All capital losses are released in the final year of the return
  • May have an amount on Line 12a of the K-1 "Excess Deductions on Termination" - These should be reported on the Individual Beneficiary's Schedule A
  • Check the Final Return box on the front of Form 1041

Exemption

  • $600 exemption

Passive Considerations

  • Passive Activity Loss Limitations are imposed at the Estate level
  • An estate is considered to be actively participating in rental real estate for the first two years after the date of death, if the decedent actively participated
  • If an estate distributes an interest in a passive activity, the basis of the property immediately before the distribution is increased by the passive activity losses allocable to the interest. Such losses cannot be deducted
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