Discussion:1041 and life insurance proceeds

1. I am assuming I would report the life insurance proceeds as tax-exempt income. 2. Would I then allocate the deductions between taxable and tax-exempt income? Or can they all be allocated to taxable income? My reading of the 1041 instructions is that if the deduction is indirectly related to both taxable and tax-exempt, they need to allocated accordingly. But I would really like to take the deductions against the taxable income only. Can I do that? 3. Some life insurance proceeds were received in Dec 2005, payable to the trust. Prior accountant did not file Form 1041 for 2005 as taxpayer passed away in late 2005. So I wouldn't necessarily be required to report life insurance proceeds received in 2005 as tax-exempt income in 2006, is that correct?

Any help is apppreciated

2) N/A if you are referring only to 1

So based on your answer, I should not report the life insurance proceeds as tax-exempt income. And all the deductions will be allocated against taxable income. If I'm misinterpreting please let me know.

The life insurance is an asset that is converted into cash, it isn't proceeds as we think of a sale of stock. It isn't "tax-exempt", tax exempt income is from muni bonds. So start back from the beginning, you have this asset no matter when it is funded by the insurance co. Your income is the interest that you have on bank accounts. If you have tax exempt income, then expenses do need to be allocated, but it sounds as if this is not the case.

There is income in respect of decedent but I've never heard anyone mention expenses in respect of decedent. Expenses of the decedent are reported only on his/her return. Expenses from date of death are in the estate. The executor may pay some of the decedent's final bills from the estate, but that doesn't make them deductible on the 1041. Best of luck, Jm

With regard to the deductions in respect of a decedent, I'm looking at page 3 of the 1041 instructions and they refer to "Income, Deductions and Credits in Respect of a Decedent" and it says that the following deductions and credits when paid by decedent's estate are allowed on Form 1041 even though they were not allowable on the decedent's final income tax return: Taxes deductible under section 164. When I looked up Section 164 it refers to state income taxes. So I do think these are deductible, but I'm open to other opinions.

Thanks.