Accountants Who Come To Us For Guidance
David M. Kaufmann, CPA
2831 Wyecliff Way
Highlands Ranch, CO 80126
PO Box 632285
Highlands Ranch, CO 80163-2285
Similarities between Form 1040 and Form 1041
- You want to include items of taxable income on Form
1041 and Form 1040. Make sure that the 1099 forms were sent to the
taxpayer have corresponding numbers on Form 1040 and Form 1041. (If Form
1041 does not cover calendar year, you may not be able to do this.)
- Many items that are deductible on Form 1040 can be
deducted on Form 1041. There are notable exceptions to this.
- BTW, a Trust and Estate Income Tax Return is often
called a Fiduciary Income Tax Return.
Differences in preparing Form 1040 and Form 1041:
(You might want to consider this as somewhat of a
checklist for preparing Form 1041. These are some items that should be
considered if you do not want the Internal Revenue Service to make out
like a bandit.
- If an asset, such as the security or real estate, has been sold
by an estate make sure that the cost basis is not what the
decedent paid but is the date of death value. Later I will discuss some
items that can increase the cost basis above the date of death value. This
tax saving feature of the law is almost always available to estates, but
not frequently available to trusts.
- If the person who passed away had a revocable
trust, consider electing to combine
the trust with the estate (IRC
This can provide a trust with benefits that are normally only available to
an estate. This includes delayed requirements for using estimated taxes,
using a fiscal year end, using higher exemption amount, etc.
- Properly elect to allocate certain deductions to
specific classes of income (Treasury Reg.
§1.652(b)-3(b)). This clearly cannot be done with Form 1040.
With the trust or estate you want to allocate indirect expenses to the
classes of income that have the highest tax rates. Example, you would want
to allocate indirect expenses to interest income, but not qualified
- There may be advantages to electing to capitalize
maintenance and other expenses related to real estate. Also, increase the
basis of the real estate by certain closing costs (IRC
- If you are not filing Form 706, consider making an
election to deduct administrative expenses on Form 1041, and not Form 706.
If you are filing both Form 1041 and Form 706 get professional advice to
determine where you want to deduct the administrative expenses. Make sure
you know what an administrative expense is.
- If you have in "Complex" trust, determine whether
you need to make an election for the 65 day rule. This is not an issue
with a "Simple" trust. "Simple" and "Complex" are technical terms.
Unfortunately, "Simple" trusts can be complicated and "Complex" trusts can
be simple to prepare.
- Choose a
year-end for the estate that is most beneficial. You do not need to go
by the IRS notices that specifies your Federal ID Number.
- Almost always capital gains are taxed to the trust
or estate at high rates. The most common exception is when it is the final
year of the trust or estate.
- Only income and deductions that are subject to
probate go on Form 1041 for an estate.
- If tax exempt income is received, make sure to
allocate the proper amount of indirect expenses to the exempt income.
- Along with capital gains, excess deductions are
treated differently in the final year of a trust or estate.
- Compute DNI, Distributable Net Income, or have the
Form 1041 tax software do that for you.
- Consider filing Form 56 to facilitate
communications with the IRS if needed.
- The deductibility of charitable deductions is
different on an estate or trust income tax return than that for an
individual income tax return. Review the trust or will. If the estate or
trust cannot take a charitable deduction. Consider a distribution to
beneficiaries so that they might be able to take a charitable contribution
that the estate cannot take.
- Form 1041 extensions are typically for 5 and a half
months. (Form 1040 extensions are usually for 6 months.)
- Obtain names, address and tax ID numbers of heirs
and beneficiaries to be able to prepare Form 1041, Schedule K-1 for those
that received a distribution. If a beneficiary does not want to
provide a Social Security Number or a Federal Tax Identification Number,
make them complete form W-9 before they receive a distribution.
- The above list includes only a portion of the
concepts that should be considered when preparing Form 1041!
If you have questions about this, do not hesitate to contact
us at 1-720-493-4804. We serve clients
all over the country. A large portion of my business is preparing tax returns
and tax planning for trusts, estates and beneficiaries of trusts and estates.
Circular 230 Notice:
The information contained here are simplifications of complex subjects. We
recommend that you talk to a CPA about this issue.
To ensure compliance with requirements imposed by the IRS, we inform you that
(i) any tax advice contained in this communication (including any attachments)
was not intended or written to be used, and cannot be used, for the purpose of
avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing
or recommending to another party any transaction or matter addressed herein.
US Estate Income Tax Return
US Estate Income Tax Return Instructions
Colorado Estate Income Tax Return
IRS Publication 559