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All About IRS Form 1041: Tax Return for Estates and Trusts

Byline profile imageWritten by Amelia Josephson
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Byline profile imageEdited by Jeff White, CEPF®
Byline profile imageEdited by Marie White, CEPF®
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If you’re designated the executor of someone’s estate, you may need to file Form 1041 to declare the income from that person’s estate (or hire someone to fill out the form for you). Form 1041 isn’t a substitute for Form 1040, though. Let’s walk through IRS Form 1041, the U.S. Income Tax Return for Estates and Trusts.

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Form 1041 Basics

In the year of a person’s death, they leave personal income and, in some cases, estate income. That’s why the individual dealing with the estate will have to file personal income taxes for the deceased and, potentially, estate income taxes, too. If the estate that a person leaves behind has income sources, that income will be reported on Form 1041. For instance, this may occur if the estate includes a property that brings in rental income, or if  it owns stocks that pay dividends. 

The bottom line is that if you’re the executor of an estate that has $600 or more of income, or if the estate has a beneficiary who is a resident alien, then you must file Form 1041. On the other hand, if the estate is distributed to beneficiaries before it can take in $600 or more of income, and none of those beneficiaries are resident aliens, filing Form 1041 is not necessary.

The most common reason for needing to file Form 1041 is to declare income from a decedent’s estate. That said, you should also use the form to declare income from a simple trust, a complex trust, a qualified disability trust, an Electing Small Business Trust (S portion only), a grantor type trust, a Chapter 7 bankruptcy estate, a Chapter 11 bankruptcy estate or a pooled income fund. If you’re unsure about the tax liabilities for your trust, ask the lawyer who helped you set up the trust for advice.

How to Fill out IRS Form 1041

It’s normal for tax accountants to take on the task of filing this form since it’s pretty complicated. But just in case you decide you want to fill it out yourself or you want to understand what your accountant is doing, let’s walk through how to fill out Form 1041. 

If you need to file Form 1041, you’ll first need to gather information about the trust or estate income you’re reporting. At the top of the form, you’ll enter the type of estate or trust in question, the Employer Identification Number (you can apply for one of these online), and other information, such as the name of the estate or trust and the name and address of its fiduciary (the person responsible for its assets on behalf of the beneficiaries).

The next section of Form 1041 covers the income of the estate or trust. It’s where you declare income from things like interest, dividends, capital gains and more. For some kinds of income, you’ll have to attach other supporting tax forms as indicated. Add up all forms of income you’ve listed and write the sum on Line 9.

Once you’ve declared the income of the estate or trust, you’ll enter deductions. Just like with personal income taxes, deductions reduce the taxable income of the estate or trust, indirectly reducing the tax bill. On Form 1041, you can claim deductions for expenses such as attorney, accountant and return preparer fees, fiduciary fees and itemized deductions.

After the section on deductions is complete, you’ll get to the section for taxes and payments. You’ll subtract deductions from income, and then use Schedule G of Form 1041 to calculate the tax owed. You can then subtract any tax payments that have already been made or withheld, any penalty owed (if applicable) or any amount overpaid (if applicable). In the case of tax overpayment, you can opt to have the overage credited to next year’s tax return or refunded to you. Then you (or your paid preparer) will sign and date the form.

The second page of Form 1041 provides detailed instructions for calculating charitable deductions and income distribution deductions (if applicable), as well as instructions on tax computation. The bottom section of page two is a series of yes-or-no questions about the income sources and business dealings of the estate or trust.

Who Pays the Tax: The Estate or the Beneficiaries?

An image of a last will and testament.

Form 1041 determines whether the estate or its beneficiaries report the income generated after someone dies. Income that stays in the estate is taxed at fiduciary rates, which reach the highest bracket quickly. For that reason, many executors try to avoid retaining taxable income unless the estate needs the cash for administration expenses or creditor claims.

When the estate distributes income to beneficiaries during the year, the tax burden generally shifts to them instead. The estate claims an income distribution deduction, and each beneficiary receives a Schedule K-1 showing the type and amount of income they must report. The character of the income carries through unchanged: Dividends remain dividends, interest remains interest and capital gains retain their character unless they are allocated to principal under the governing instrument or state law.

Specific bequests and distributions of principal do not carry taxable income. Only amounts classified as distributable net income (DNI) can pass through to beneficiaries. Executors also have access to the “65-day rule,” which allows distributions made within 65 days after year-end to be treated as prior-year distributions if the executor elects it. This can shift income to the year where it is more efficiently taxed and help the estate manage its tax brackets.

Because these choices determine where the tax liability lands, executors often review projected income, upcoming expenses and potential distributions before filing Form 1041. Proper classification of receipts and payments is essential, since it controls the computation of DNI and the amount that can be deducted or passed through.

Bottom Line

An advisor and client reviewing IRS Form 1041.

Even estates too small to trigger the estate tax can be large enough to create significant paperwork. And if the estate has income, that will need to be reported on Form 1041. If you’re the executor of an estate, it may fall on you to fill out (or hire someone else to fill out), Form 1041. Before you get started preparing the form it’s a good idea to gather all the relevant documentation for the estate or trust. That way, you won’t have to keep starting and stopping while you look for more information that will help you give the IRS what it needs.

Estate Planning Tips

  • Some financial advisors can help with estate planning. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Check out our capital gains tax calculator for help understanding potential tax liability on the sale of your assets.

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