1041 Tax Advice

The trustee of an estate or trust is responsible for filing an annual Form 1041.

The trustee of an estate or trust is responsible for filing an annual Form 1041.

The IRS Form 1041 is the federal tax filing form for estates and trusts. The 1041 serves the same purpose as the Form 1040 used by individuals to file a personal income tax return. The Form 1041 will look familiar to anyone who has filed a Form 1040 for their personal income taxes. The major difference concerns the handling of net income earned by the trust or estate.

Who Files the 1041

The filing of a Form 1041 is the responsibility of the person with fiduciary responsibility for the trust or estate. If the Form 1041 is on behalf of a trust, the trustee must ensure the form is completed and filed when required. For an estate, the executor or court-appointed trustee of the estate is the responsible party. A completed Form 1041 must be signed by the person with fiduciary responsibility and the person who prepared the form -- such as a certified public accountant.

What is Reported

The Form 1041 has sections to list the different types of income and deductions for the trust or estate. Income can include interest, dividends, royalties, rents, capital gains, farm income and business income. The deduction categories on the Form 1041 include interest and taxes paid and professional fees, such as for the trustee and attorneys. The trust or estate also deducts any distributions made to the beneficiary or beneficiaries of the estate or trust. In this respect, a trust or estate acts as a pass-through structure and does not pay taxes on any earnings passed through to beneficiaries.

Tax Rates

The tax rates for an estate or trust are bracketed using the same rates as for personal income taxes. However, taxes are charged on the first dollar of income after the deductions are subtracted, and the highest tax bracket is reached at a low level -- $11,350 in 2012 -- of income retained in the trust. The low tax bracket thresholds mean that income retained in a trust or estate probably will be taxed at higher rates than if the money is distributed to the beneficiaries.

1041 Specific Attachments

The Form 1041 directions require the completion and attachment of many of the same forms used on personal tax returns, such as Schedule C for business income and Schedule D for reporting capital gains. The important distinction with filing a Form 1041 is the pass through and payment of income to beneficiaries. Those payments are reported on Schedule B. The trust or estate also must complete an IRS Form K-1 for each beneficiary. The beneficiaries use the K-1 to report the income on their individual tax returns. Copies of K-1 forms must be attached to the Form 1041.

Filing Dates

Trusts or estates on a calendar year accounting system must file by the same date as for personal income tax returns -- usually on April 15. If a different fiscal year is used, the filing deadline is the 15th day of the fourth month following the close of the accounting year. A Form 7004 can be filed before the required filing date to get an automatic five month extension to file.

About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.

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