Publication 559 |
2000 Tax Year |
Income Tax Return of an Estate-- Form 1041
An estate is a taxable entity separate from the decedent and comes
into being with the death of the individual. It exists until the final
distribution of its assets to the heirs and other beneficiaries. The
income earned by the assets during this period must be reported by the
estate under the conditions described in this publication. The tax
generally is figured in the same manner and on the same basis as for
individuals, with certain differences in the computation of deductions
and credits, as explained later.
The estate's income, like an individual's income, must be reported
annually on either a calendar or fiscal year basis. As the personal
representative, you choose the estate's accounting period when you
file its first Form 1041. The estate's first tax year can be any
period that ends on the last day of a month and does not exceed 12
months.
Once you choose the tax year, you generally cannot change it
without IRS approval. Also, on the first income tax return, you must
choose the accounting method (cash, accrual, or other) you will use to
report the estate's income. Once you have used a method, you
ordinarily cannot change it without IRS approval. For a more complete
discussion of accounting periods and methods, see Publication 538,
Accounting Periods and Methods.
Filing Requirements
Every domestic estate with gross income of $600 or more during a
tax year must file a Form 1041. If one or more of the beneficiaries of
the domestic estate are nonresident alien individuals, the personal
representative must file Form 1041, even if the gross income of the
estate is less than $600.
A fiduciary for a nonresident alien estate with U.S. source income,
including any income that is effectively connected with the conduct of
a trade or business in the United States, must file Form 1040NR,
U.S. Nonresident Alien Income Tax Return, as the
income tax return of the estate.
A nonresident alien who was a resident of Puerto Rico, Guam,
American Samoa, or the Commonwealth of the Northern Mariana Islands
for the entire tax year will, for this purpose, be treated as a
resident alien of the United States.
Schedule K-1 (Form 1041)
As personal representative, you must file a separate Schedule
K-1 (Form 1041), or an acceptable substitute (described below),
for each beneficiary. File these schedules with Form 1041.
You must show each beneficiary's taxpayer identification number. A
$50 penalty is charged for each failure to provide the identifying
number of each beneficiary unless reasonable cause is established for
not providing it. When you assume your duties as the personal
representative, you must ask each beneficiary to give you a taxpayer
identification number (TIN). However, a TIN is not required of a
nonresident alien beneficiary unless the beneficiary or the estate is
engaged in a trade or business within the United States. For payments
after 2000, a nonresident alien beneficiary that gives you a
withholding certificate generally must provide you with a TIN (see
Publication 515).
A TIN is not required for an executor or
administrator of the estate unless that person is also a beneficiary.
As personal representative, you must also furnish a Schedule
K-1 (Form 1041), or a substitute, to the beneficiary by the date
on which the Form 1041 is filed. Failure to provide this payee
statement can result in a penalty of $50 for each failure. This
penalty also applies if you omit information or include incorrect
information on the payee statement.
You do not need prior approval for a substitute Schedule
K-1 (Form 1041) that is an exact copy of the official schedule
or that follows the specifications in Publication 1167,
Substitute Printed, Computer-Prepared, and Computer-Generated Tax
Forms and Schedules. You must have prior approval for any other
substitute Schedule K-1 (Form 1041).
Beneficiaries.
The personal representative has a fiduciary responsibility to the
ultimate recipients of the income and the property of the estate.
While the courts use a number of names to designate specific types of
beneficiaries or the recipients of various types of property, it is
sufficient in this publication to call all of them beneficiaries.
Liability of the beneficiary.
The income tax liability of an estate attaches to the assets of the
estate. If the income is distributed or must be distributed during the
current tax year, it is reportable by each beneficiary on his or her
individual income tax return. If the income does not have to be
distributed, and is not distributed but is retained by the estate, the
income tax on the income is payable by the estate. If the income is
distributed later without the payment of the taxes due, the
beneficiary can be liable for tax due and unpaid, to the extent of the
value of the estate assets received.
Income of the estate is taxed to either the estate or the
beneficiary, but not to both.
Nonresident alien beneficiary.
As a resident or domestic fiduciary, in addition to filing Form
1041, you must file the return and pay the tax that may be due from a
nonresident alien beneficiary. Depending upon a number of factors, you
may or may not have to file Form 1040NR for that beneficiary. For
information on who must file Form 1040NR, see Publication 519,
U.S. Tax Guide for Aliens.
You do not have to file the nonresident alien's return and pay the
tax if that beneficiary has appointed an agent in the United States to
file a federal income tax return. However, you must attach to the
estate's return (Form 1041) a copy of the document that appoints the
beneficiary's agent. You also must file
Form 1042, Annual Withholding Tax
Return for U.S. Source Income of Foreign Persons, in connection
with income tax to be paid at the source on certain payments to
nonresident aliens.
Amended Return
If you have to file an amended Form 1041, use a copy of the form
for the appropriate year and check the "Amended return" box.
Complete the entire return, correct the appropriate lines with the new
information, and refigure the tax liability. On an attached sheet,
explain the reason for the changes and identify the lines and amounts
being changed.
If the amended return results in a change to income, or a change in
distribution of any income or other information provided to a
beneficiary, you must file an amended Schedule K-1 (Form 1041)
and give a copy to each beneficiary. Check the "Amended K-1"
box at the top of Schedule K-1.
Information Returns
Even though you may not have to file an income tax return for the
estate, you may have to file Form 1099-DIV, Form 1099-INT,
or Form 1099-MISC if you receive the income as a nominee or
middleman for another person. For more information on filing
information returns, see the General Instructions for Forms 1099,
1098, 5498, and W-2G.
You will not have to file information returns for the estate if the
estate is the owner of record and you file an income tax return for
the estate on Form 1041 giving the name, address, and identifying
number of each actual owner and furnish a completed Schedule K-1
(Form 1041) to each actual owner.
Penalty.
A penalty of up to $50 can be charged for each failure to file or
failure to include correct information on an information return.
(Failure to include correct information includes failure to include
all the information required and inclusion of incorrect information.)
If it is shown that such failure is due to intentional disregard of
the filing requirement, the penalty amount increases.
See the General Instructions for Forms 1099, 1098, 5498, and
W-2G for more information.
Two or More
Personal Representatives
If property is located outside the state in which the decedent's
home was located, more than one personal representative may be
designated by the will or appointed by the court. The person
designated or appointed to administer the estate in the state of the
decedent's permanent home is called the domiciliary
representative. The person designated or appointed to administer
property in a state other than that of the decedent's permanent home
is called an ancillary representative.
Separate Forms 1041.
Each representative must file a separate Form 1041. The domiciliary
representative must include the estate's entire income in the return.
The ancillary representative files with the appropriate IRS office for
the ancillary's location. The ancillary representative should provide
the following information on the return.
- The name and address of the domiciliary
representative.
- The amount of gross income received by the ancillary
representative.
- The deductions claimed against that income (including any
income properly paid or credited by the ancillary representative to a
beneficiary).
Estate of a nonresident alien.
If the estate of a nonresident alien has a nonresident alien
domiciliary representative and an ancillary representative who is a
citizen or resident of the United States, the ancillary
representative, in addition to filing a Form 1040NR to provide the
information described in the preceding paragraph, must also file the
return that the domiciliary representative otherwise would have to
file.
Copy of the Will
You do not have to file a copy of the decedent's will unless
requested by the IRS. If requested, you must attach a statement to it
indicating the provisions that, in your opinion, determine how much of
the estate's income is taxable to the estate or to the beneficiaries.
You should also attach a statement signed by you under penalties of
perjury that the will is a true and complete copy.
Income To Include
The estate's taxable income generally is figured the same way as an
individual's income, except as explained in the following discussions.
Gross income of an estate consists of all items of income received
or accrued during the tax year. It includes dividends, interest,
rents, royalties, gain from the sale of property, and income from
business, partnerships, trusts, and any other sources. For a
discussion of income from dividends, interest, and other investment
income and also gains and losses from the sale of investment property,
see Publication 550.
For a discussion of gains and losses from the
sale of other property, including business property, see Publication 544,
Sales and Other Dispositions of Assets.
If, as the personal representative, your duties include the
operation of the decedent's business, see Publication 334.
This
publication provides general information about the tax laws that apply
to a sole proprietorship.
Income in respect of the decedent.
As the personal representative of the estate, you may receive
income that the decedent would have reported had death not occurred.
For an explanation of this income, see Income in Respect of the
Decedent under Other Tax Information, earlier. An
estate may qualify to claim a deduction for estate taxes if the estate
must include in gross income for any tax year an amount of income in
respect of a decedent. See Estate Tax Deduction, earlier,
under Other Tax Information.
Gain (or loss) from sale of property.
During the administration of the estate, you may find it necessary
or desirable to sell all or part of the estate's assets to pay debts
and expenses of administration, or to make proper distributions of the
assets to the beneficiaries. While you may have the legal authority to
dispose of the property, title to it may be vested (given a legal
interest in the property) in one or more of the beneficiaries. This is
usually true of real property. To determine whether any gain or loss
must be reported by the estate or by the beneficiaries, consult local
law to determine the legal owner.
Redemption of stock to pay death taxes.
Under certain conditions, a distribution to a shareholder
(including the estate) in redemption of stock that was included in the
decedent's gross estate may be allowed capital gain (or loss)
treatment.
Character of asset.
The character of an asset in the hands of an estate determines
whether gain or loss on its sale or other disposition is capital or
ordinary. The asset's character depends on how the estate holds or
uses it. If it was a capital asset to the decedent, it generally will
be a capital asset to the estate. If it was land or depreciable
property used in the decedent's business and the estate continues the
business, it generally will have the same character to the estate that
it had in the decedent's hands. If it was held by the decedent for
sale to customers, it generally will be considered to be held for sale
to customers by the estate if the decedent's business continues to
operate during the administration of the estate.
An estate and a beneficiary of that estate are generally treated as
related persons for purposes of treating the gain on the sale of
depreciable property between the parties as ordinary income. This does
not apply to a sale or exchange made to satisfy a pecuniary bequest.
Holding period.
An estate (or other recipient) that acquires a capital asset from a
decedent and sells or otherwise disposes of it is considered to have
held that asset for more than 1 year, regardless of how long the asset
is held.
Basis of asset.
The basis used to figure gain or loss for property the estate
receives from the decedent usually is its fair market value at the
date of death. See Basis of Inherited Property under
Other Tax Information, earlier, for other basis in
inherited property.
If the estate purchases property after the decedent's death, the
basis generally will be its cost.
The basis of certain appreciated property the estate receives from
the decedent will be the decedent's adjusted basis in the property
immediately before death. This applies if the property was acquired by
the decedent as a gift during the 1-year period before death, the
property's fair market value on the date of the gift was greater than
the donor's adjusted basis, and the proceeds of the sale of the
property are distributed to the donor (or the donor's spouse).
Schedule D (Form 1041).
To report gains (and losses) from the sale or exchange of capital
assets by the estate, file Schedule D (Form 1041), Capital Gains
and Losses, with Form 1041. For additional information about the
treatment of capital gains and losses, see the instructions for
Schedule D (Form 1041).
Installment obligations.
If an installment obligation owned by the decedent is transferred
by the estate to the obligor (buyer or person obligated to pay) or is
canceled at death, include the income from that event in the gross
income of the estate. See Installment obligations under
Income in Respect of the Decedent, earlier. See Publication 537
for information about installment sales.
Gain from sale of special-use valuation property.
If you elected special-use valuation for farm or other closely held
business real property and that property is sold to a qualified
heir, the estate will recognize gain on the sale if the fair
market value on the date of the sale exceeds the fair market value on
the date of the decedent's death (or on the alternate valuation date
if it was elected).
Qualified heirs.
Qualified heirs include the decedent's ancestors (parents,
grandparents, etc.) and spouse, the decedent's lineal descendants
(children, grandchildren, etc.) and their spouses, and lineal
descendants (and their spouses) of the decedent's parents or spouse.
For more information about special-use valuation, see Form 706 and
its instructions.
Gain from transfer of property to a political organization.
Appreciated property that is transferred to a political
organization is treated as sold by the estate. Appreciated property is
property that has a fair market value (on the date of the transfer)
greater than the estate's basis. The gain recognized is the difference
between the estate's basis and the fair market value on the date
transferred.
A political organization is any party, committee, association,
fund, or other organization formed and operated to accept
contributions or make expenditures for influencing the nomination,
election, or appointment of an individual to any federal, state, or
local public office.
Gain or loss on distributions in kind.
An estate recognizes gain or loss on a distribution of property in
kind to a beneficiary only in the following situations.
- The distribution satisfies the beneficiary's right to
receive either--
- A specific dollar amount (whether payable in cash, in
unspecified property, or in both), or
- A specific property other than the property
distributed.
- You choose to recognize the gain or loss on the estate's
income tax return.
The gain or loss is usually the difference between the fair
market value of the property when distributed and the estate's basis
in the property. But see Gain from sale of special-use valuation
property, earlier, for a limit on the gain recognized on a
transfer of such property to a qualified heir.
If you choose to recognize gain or loss, the choice applies to all
noncash distributions during the tax year except charitable
distributions and specific bequests. To make the choice, report the
gain or loss on a Schedule D (Form 1041) attached to the estate's Form
1041 and check the box on line 7 in the Other Information
section of Form 1041. You must make the choice by the due date
(including extensions) of the estate's income tax return for the year
of distribution. However, if you timely filed your return for the year
without making the choice, you can still make the choice by filing an
amended return within six months of the due date of the return
(excluding extensions). Attach Schedule D (Form 1041) to the amended
return and write "Filed pursuant to section 301.9100-2" on
the form. File the amended return at the same address you filed the
original return. You must get the consent of the IRS to revoke the
choice.
For more information, see Property distributed in kind
under Distributions Deduction, later.
Exemption
and Deductions
In figuring taxable income, an estate is generally allowed the same
deductions as an individual. Special rules, however, apply to some
deductions for an estate. This section includes discussions of those
deductions affected by the special rules.
Exemption Deduction
An estate is allowed an exemption deduction of $600 in figuring its
taxable income. No exemption for dependents is allowed to an estate.
Even though the first return of an estate may be for a period of less
than 12 months, the exemption is $600. If, however, the estate was
given permission to change its accounting period, the exemption is $50
for each month of the short year.
Contributions
An estate qualifies for a deduction for amounts of gross income
paid or permanently set aside for qualified charitable organizations.
The adjusted gross income limits for individuals do not apply.
However, to be deductible by an estate, the contribution must be
specifically provided for in the decedent's will. If there is no will,
or if the will makes no provision for the payment to a charitable
organization, then a deduction will not be allowed even though all of
the beneficiaries may agree to the gift.
You cannot deduct any contribution from income that is not included
in the estate's gross income. If the will specifically provides that
the contributions are to be paid out of the estate's gross income, the
contributions are fully deductible. However, if the will contains no
specific provisions, the contributions are considered to have been
paid and are deductible in the same proportion as the gross income
bears to the total of all classes (taxable and nontaxable) of income.
You cannot deduct a qualified conservation easement granted after
the date of death and before the due date of the estate tax return. A
contribution deduction is allowed to the estate for estate tax
purposes.
For more information about contributions, see Publication 526,
Charitable Contributions, and Publication 561,
Determining the Value of Donated Property.
Losses
Generally, an estate can claim a deduction for a loss that it
sustains on the sale of property. This includes a loss from the sale
of property (other than stock) to a personal representative of the
estate, unless that person is a beneficiary of the estate.
For a discussion of an estate's recognized loss on a distribution
of property in kind to a beneficiary, see Income To Include,
earlier.
An estate and a beneficiary of that estate are generally treated as
related persons for purposes of the disallowance of a loss on the sale
of an asset between related persons. The disallowance does not apply
to a sale or exchange made to satisfy a pecuniary bequest.
Net operating loss deduction.
An estate can claim a net operating loss deduction, figured in the
same way as an individual's, except that it cannot deduct any
distributions to beneficiaries (discussed later) or the deduction for
charitable contributions in figuring the loss or the loss carryover.
For a discussion of the carryover of an unused net operating loss to a
beneficiary upon termination of the estate, see Termination of
Estate, later.
For information on net operating losses, see Publication 536,
Net Operating Losses.
Casualty and theft losses.
Losses incurred for casualty and theft during the administration of
the estate can be deducted only if they have not been claimed on the
federal estate tax return (Form 706). You must file a statement with
the estate's income tax return waiving the deduction for estate tax
purposes. See Administration Expenses, later.
The same rules that apply to individuals apply to the estate,
except that in figuring the adjusted gross income of the estate used
to figure the deductible loss, you deduct any administration expenses
claimed. Use Form 4684, Casualties and Thefts, and its
instructions to figure any loss deduction.
Carryover losses.
Carryover losses resulting from net operating losses or capital
losses sustained by the decedent before death cannot be
deducted on the estate's income tax return.
Administration Expenses
Expenses of administering an estate can be deducted either from the
gross estate in figuring the federal estate tax on Form 706 or from
the estate's gross income in figuring the estate's income tax on Form
1041. However, these expenses cannot be claimed for both
estate tax and income tax purposes. In most cases, this rule
also applies to expenses incurred in the sale of property by an estate
(not as a dealer).
To prevent a double deduction, amounts otherwise allowable in
figuring the decedent's taxable estate for federal estate tax on Form
706 will not be allowed as a deduction in figuring the income tax of
the estate or of any other person unless the personal representative
files a statement, in duplicate, that the items of expense, as listed
in the statement, have not been claimed as deductions for federal
estate tax purposes and that all rights to claim such deductions are
waived. One deduction or part of a deduction can be claimed
for income tax purposes if the appropriate statement is filed, while
another deduction or part is claimed for estate tax purposes. Claiming
a deduction in figuring the estate income tax is not prevented when
the same deduction is claimed on the estate tax return, so long as the
estate tax deduction is not finally allowed and the preceding
statement is filed. The statement can be filed with the income tax
return or at any time before the expiration of the statute of
limitations that applies to the tax year for which the deduction is
sought. This waiver procedure also applies to casualty losses incurred
during administration of the estate.
Accrued expenses.
The rules preventing double deductions do not apply to deductions
for taxes, interest, business expenses, and other items accrued at the
date of death. These expenses are allowable as a deduction for estate
tax purposes as claims against the estate and also are allowable as
deductions in respect of a decedent for income tax purposes.
Deductions for interest, business expenses, and other items not
accrued at the date of the decedent's death are allowable only as a
deduction for administration expenses for both estate and income tax
purposes and do not qualify for a double deduction.
Expenses allocable to tax-exempt income.
When figuring the estate's taxable income on Form 1041, you cannot
deduct administration expenses allocable to any of the estate's
tax-exempt income. However, you can deduct these administration
expenses when figuring the taxable estate for federal estate tax
purposes on Form 706.
Interest on estate tax.
Interest paid on installment payments of estate tax is not
deductible for income or estate tax purposes.
Depreciation and Depletion
The allowable deductions for depreciation and depletion that accrue
after the decedent's death must be apportioned between the estate and
the beneficiaries, depending on the income of the estate that is
allocable to each.
Example.
In 2000 the decedent's estate realized $3,000 of business income
during the administration of the estate. The personal representative
distributed $1,000 of the income to the decedent's son Ned and $2,000
to another son, Bill. The allowable depreciation on the business
property is $300. Ned can take a deduction of $100 [($1,000
x $3,000) x $300], and Bill can take a deduction of
$200 [($2,000 x $3,000) x $300].
Distributions Deduction
An estate is allowed a deduction for the tax year for any income
that must be distributed currently and for other amounts that are
properly paid or credited, or that must be distributed to
beneficiaries. The deduction is limited to the distributable net
income of the estate.
For special rules that apply in figuring the estate's distribution
deduction, see Special Rules for Distributions under
Distributions to Beneficiaries From an Estate, later.
Distributable net income.
Distributable net income (determined on Schedule B of Form 1041) is
the estate's income available for distribution. It is the estate's
taxable income, with the following modifications.
Distributions to beneficiaries.
Distributions to beneficiaries are not deducted.
Estate tax deduction.
The deduction for estate tax on income in respect of the decedent
is not allowed.
Personal exemption.
No personal exemption deduction is allowed.
Capital gains.
Capital gains ordinarily are not included in distributable net
income. However, you include them in distributable net income if any
of the following apply.
- The gain is allocated to income in the accounts of the
estate or by notice to the beneficiaries under the terms of the will
or by local law.
- The gain is allocated to the corpus or principal of the
estate and is actually distributed to the beneficiaries during the tax
year.
- The gain is used, under either the terms of the will or the
practice of the personal representative, to determine the amount that
is distributed or must be distributed.
- Charitable contributions are made out of capital
gains.
Generally, when you determine capital gains to be included in
distributable net income, the 50% exclusion for gain from the sale or
exchange of qualified small business stock is not taken into account.
Capital losses.
Capital losses are excluded in figuring distributable net income
unless they enter into the computation of any capital gain that is
distributed or must be distributed during the year.
Tax-exempt interest.
Tax-exempt interest, including exempt-interest dividends, though
excluded from the estate's gross income, is included in the
distributable net income, but is reduced by the following items.
- The expenses that were not allowed in computing the estate's
taxable income because they were attributable to tax-exempt interest
(see Expenses allocable to tax-exempt income under
Administration Expenses, earlier).
- The part of the tax-exempt interest deemed to have been used
to make a charitable contribution. See Contributions,
earlier.
The total tax-exempt interest earned by an estate must be shown in
the Other Information section of Form 1041. The
beneficiary's part of the tax-exempt interest is shown on Schedule
K-1, Form 1041.
Separate shares rule.
The separate shares rule must be used if both of the following are
true.
- The estate has more than one beneficiary.
- The economic interest of a beneficiary does not affect and
is not affected by the economic interest of another
beneficiary.
A bequest of a specific sum of money or of property is not a
separate share (see Bequests, later, under Special
Rules for Distributions).
Note.
The separate shares rule applies to the estates of decedents dying
after August 5, 1997. The IRS will accept any reasonable
interpretation of the rule for estates of decedents who died before
December 28, 1999. The rules discussed in this section apply to the
estates of decedents dying on or after December 28, 1999.
If the separate shares rule applies, the separate shares are
treated as separate estates for the sole purpose of determining the
distributable net income allocable to a share. Each share's
distributable net income is based on that share's portion of gross
income and any applicable deductions or losses. You must use a
reasonable and equitable method to make the allocations.
Generally, gross income is allocated among the separate shares
based on the income that each share is entitled to under the will or
applicable local law. This includes gross income that is not received
in cash, such as a distributive share of partnership tax items.
If a beneficiary is not entitled to any of the estate's income, the
distributable net income for that beneficiary is zero. The estate
cannot deduct any distribution made to that beneficiary and the
beneficiary does not have to include the distribution in its gross
income. However, see Income in respect of a decedent, later
in this discussion.
Example.
Patrick's will directs you, the executor, to distribute ABC
Corporation stock and all dividends from that stock to his son,
Edward, and the residue of the estate to his son, Michael. The estate
has two separate shares consisting of the dividends on the stock left
to Edward and the residue of the estate left to Michael. Since the
distribution of the ABC Corporation stock qualifies as a bequest, it
is not a separate share.
If any distributions, other than the ABC Corporation stock, are
made during the year to either Edward or Michael, you must determine
the distributable net income for each separate share. The
distributable net income for Edward's separate share includes only the
dividends attributable to the ABC Corporation stock. The distributable
net income for Michael's separate share includes all other income.
Income in respect of a decedent.
This income is allocated among the separate shares that could
potentially be funded with these amounts, even if the share is not
entitled to receive any income under the will or applicable local law.
This allocation is based on the relative value of each share that
could potentially be funded with these amounts.
Example 1.
Frank's will directs you, the executor, to divide the residue of
his estate (valued at $900,000) equally between his two children, Judy
and Ann. Under the will, you must fund Judy's share first with the
proceeds of Frank's traditional IRA. The $90,000 balance in the IRA
was distributed to the estate during the year. This amount is included
in the estate's gross income as income in respect of the decedent and
is allocated to the corpus of the estate. The estate has two separate
shares, one for the benefit of Judy and one for the benefit of Ann. If
any distributions are made to either Judy or Ann during the year,
then, for purposes of determining the distributable net income for
each separate share, the $90,000 of income in respect of the decedent
must be allocated only to Judy's share.
Example 2.
Assume the same facts as in Example 1, except that you must fund
Judy's share first with DEF Corporation stock valued at $300,000,
rather than the IRA proceeds. To determine the distributable net
income for each separate share, the $90,000 of income in respect of
the decedent must be allocated between the two shares to the extent
they could potentially be funded with that income. The maximum amount
of Judy's share that could be funded with that income is $150,000
($450,000 value of share less $300,000 funded with stock). The maximum
amount of Ann's share that could be funded is $450,000. Based on the
relative values, Judy's distributable net income includes $22,500
($150,000/$600,000 X $90,000) of the income in respect of the decedent
and Ann's distributable net income includes $67,500 ($450,000/$600,000
X $90,000).
Income that must be distributed currently.
The distributions deduction includes any amount of income that,
under the terms of the decedent's will or by reason of local law, must
be distributed currently. This includes an amount that may be paid out
of income or corpus (such as an annuity) to the extent it is paid out
of income for the tax year. The deduction is allowed to the estate
even if the personal representative does not make the distribution
until a later year or makes no distribution until the final settlement
and termination of the estate.
Support allowances.
The distribution deduction includes any support allowance that,
under a court order or decree or local law, the estate must pay the
decedent's surviving spouse or other dependent for a limited period
during administration of the estate. The allowance is deductible as
income that must be distributed currently or as any other amount paid,
credited, or required to be distributed, as discussed next.
Any other amount paid, credited, or required to be
distributed.
Any other amount paid, credited, or required to be distributed is
allowed as a deduction to the estate only in the year actually paid,
credited, or distributed. If there is no specific requirement by local
law or by the terms of the will that income earned by the estate
during administration be distributed currently, a deduction for
distributions to the beneficiaries will be allowed to the estate, but
only for the actual distributions during the tax year.
If the personal representative has discretion as to when the income
is distributed, the deduction is allowed only in the year of
distribution.
The personal representative can elect to treat distributions paid
or credited within 65 days after the close of the estate's tax year as
having been paid or credited on the last day of that tax year. The
election is made by completing line 6 in the Other Information
section of Form 1041. If a tax return is not required, the
election is made on a statement which is filed with the IRS office
where the return would have been filed. The election is irrevocable
for the tax year and is only effective for the year of the election.
Alimony and separate maintenance.
Alimony and separate maintenance payments that must be included in
the spouse's or former spouse's income may be deducted as income that
must be distributed currently if they are paid, credited, or
distributed out of the income of the estate for the tax year. That
spouse or former spouse is treated as a beneficiary.
Payment of beneficiary's obligations.
Any payment made by the estate to satisfy a legal obligation of any
person is deductible as income that must be distributed currently or
as any other amount paid, credited, or required to be distributed.
This includes a payment made to satisfy the person's obligation under
local law to support another person, such as the person's minor child.
The person whose obligation is satisfied is treated as a beneficiary
of the estate.
This does not apply to a payment made to satisfy a person's
obligation to pay alimony or separate maintenance.
Interest in real estate.
The value of an interest in real estate owned by a decedent, title
to which passes directly to the beneficiaries under local law, is not
included as any other amount paid, credited, or required to be
distributed.
Property distributed in kind.
If an estate distributes property in kind, the estate's deduction
ordinarily is the lesser of its basis in the property or the
property's fair market value when distributed. However, the deduction
is the property's fair market value if the estate recognizes gain on
the distribution. See Gain or loss on distributions in kind
under Income To Include, earlier.
Property is distributed in kind if it satisfies the beneficiary's
right to receive another property or amount, such as the income of the
estate or a specific dollar amount. It generally includes any noncash
distribution other than the following.
- A specific bequest (unless it must be distributed in more
than three installments).
- Real property, the title to which passes directly to the
beneficiary under local law.
Character of amounts distributed.
If the decedent's will or local law does not provide for the
allocation of different classes of income, you must treat the amount
deductible for distributions to beneficiaries as consisting of the
same proportion of each class of items entering into the computation
of distributable net income as the total of each class bears to the
total distributable net income. For more information about the
character of distributions, see Character of Distributions
under Distributions to Beneficiaries From an Estate,
later.
Example.
An estate has distributable net income of $2,000, consisting of
$1,000 of taxable interest and $1,000 of rental income. Distributions
to the beneficiary total $1,500. The distribution deduction consists
of $750 of taxable interest and $750 of rental income, unless the will
or local law provides a different allocation.
Limit on deduction for distributions.
You cannot deduct any amount of distributable net income not
included in the estate's gross income.
Example.
An estate has distributable net income of $2,000, consisting of
$1,000 of dividends and $1,000 of tax-exempt interest. Distributions
to the beneficiary total $1,500. Except for this rule, the
distribution deduction would be $1,500 ($750 of dividends and $750 of
tax-exempt interest). However, as the result of this rule, the
distribution deduction is limited to $750, because no deduction is
allowed for the tax-exempt interest distributed.
Funeral and Medical Expenses
No deduction can be taken for funeral expenses or medical and
dental expenses on the estate's income tax return, Form 1041.
Funeral expenses.
Funeral expenses paid by the estate are not deductible in figuring
the estate's taxable income on Form 1041. They are deductible only for
determining the taxable estate for federal estate tax purposes on Form
706.
Medical and dental expenses of a decedent.
The medical and dental expenses of a decedent paid by the estate
are not deductible in figuring the estate's taxable income on Form
1041. You can deduct them in figuring the taxable estate for federal
estate tax purposes on Form 706. If these expenses are paid within the
1-year period beginning with the day after the decedent's death, you
can elect to deduct them on the decedent's income tax return (Form
1040) for the year in which they were incurred. See Medical
Expenses under Final Return for Decedent, earlier.
Credits, Tax,
and Payments
This section includes brief discussions of some of the tax credits,
types of taxes that may be owed, and estimated tax payments that are
reported on the estate's income tax return, Form 1041.
Credits
Estates generally are allowed some of the same tax credits that are
allowed to individuals. The credits generally are allocated between
the estate and the beneficiaries. However, estates are not allowed the
credit for the elderly or the disabled, the child tax credit, or the
earned income credit discussed earlier under Final Return for
Decedent.
Foreign tax credit.
Foreign tax credit is discussed in Publication 514,
Foreign
Tax Credit for Individuals.
General business credit.
The general business credit is available to an estate that is
involved in a business. For more information, see Publication 334.
Tax
An estate cannot use the Tax Table that applies to individuals. The
tax rate schedule to use is in the instructions for Form 1041.
Alternative minimum tax (AMT).
An estate may be liable for the alternative minimum tax. To figure
the alternative minimum tax, use Schedule I (Form 1041),
Alternative Minimum Tax. Certain credits may be limited by
any "tentative minimum tax" figured on line 37, Part III of
Schedule I (Form 1041), even if there is no alternative minimum tax
liability.
If the estate takes a deduction for distributions to beneficiaries,
complete Part I and Part II of Schedule I even if the estate does not
owe alternative minimum tax. Allocate the income distribution
deduction figured on a minimum tax basis among the beneficiaries and
report each beneficiary's share on Schedule K-1 (Form 1041).
Also show each beneficiary's share of any adjustments or tax
preference items for depreciation, depletion, and amortization.
For more information, see the instructions to Form 1041.
Payments
The estate's income tax liability must be paid in full when the
return is filed. You may have to pay estimated tax, however, as
explained below.
Estimated tax.
Estates with tax years ending 2 or more years after the date of the
decedent's death must pay estimated tax in the same manner as
individuals.
If you must make estimated tax payments for 2001, use Form
1041-ES, Estimated Income Tax for Estates and Trusts,
to determine the estimated tax to be paid.
Generally, you must pay estimated tax if the estate is expected to
owe, after subtracting any withholding and credits, at least $1,000 in
tax for 2001. You will not, however, have to pay estimated tax if you
expect the withholding and credits to be at least:
- 90% of the tax to be shown on the 2001 return, or
- 100% of the tax shown on the 2000 return (assuming the
return covered all 12 months).
The percentage in (2) above is 110% if the estate's 2000
adjusted gross income (AGI) was more than $150,000. To figure the
estate's AGI, see the instructions for line 15b, Form 1041.
The general rule is that you must make your first estimated tax
payment by April 16, 2001. You can either pay all of your estimated
tax at that time or pay it in four equal amounts that are due by April
16, 2001; June 15, 2001; September 17, 2001; and January 15, 2002. For
exceptions to the general rule, see the instructions for Form
1041-ES and Publication 505,
Tax Withholding and Estimated
Tax.
If your return is on a fiscal year basis, your due dates are the
15th day of the 4th, 6th, and 9th months of your fiscal year and the
1st month of the following fiscal year.
If any of these dates fall on a Saturday, Sunday, or legal holiday,
the due date is the next business day.
You may be charged a penalty for not paying enough estimated tax or
for not making the payment on time in the required amount (even if you
have an overpayment on your tax return). Use Form 2210,
Underpayment of Estimated Tax by Individuals, Estates, and
Trusts, to figure any penalty.
For more information, see the instructions for Form 1041-ES
and Publication 505.
Name, Address,
and Signature
In the top space of the name and address area of Form 1041, enter
the exact name of the estate from the Form SS-4 used to apply
for the estate's employer identification number. In the remaining
spaces, enter the name and address of the personal representative
(fiduciary) of the estate.
Signature.
The personal representative (or its authorized officer if the
personal representative is not an individual) must sign the return. An
individual who prepares the return for pay must manually sign the
return as preparer. Signature stamps or labels are not acceptable. For
additional information about the requirements for preparers of
returns, see the instructions for Form 1041.
When and Where To File
When you file Form 1041 (or Form 1040NR if it applies) depends on
whether you choose a calendar year or a fiscal year as the estate's
accounting period. Where you file Form 1041 depends on where you, as
the personal representative, live or have your principal office.
When to file.
If you choose the calendar year as the estate's accounting period,
the Form 1041 for 2000 is due by April 16, 2001 (June 15, 2001, in the
case of Form 1040NR for a nonresident alien estate that does not have
an office in the United States). If you choose a fiscal year, the Form
1041 is due by the 15th day of the 4th month (6th month in the case of
Form 1040NR) after the end of the tax year. If the due date is a
Saturday, Sunday, or legal holiday, the due date is the next business
day.
Extension of time to file.
An extension of time to file Form 1041 may be granted if you have
clearly described the reasons that will cause your delay in filing the
return. Use Form 2758, Application for Extension of Time To File
Certain Excise, Income, Information, and Other Returns, to
request an extension. The extension is not automatic, so you should
request it early enough for the IRS to act on the application before
the regular due date of Form 1041. You should file Form 2758 in
duplicate with the IRS office where you must file Form 1041.
If you have not yet established an accounting period, filing Form
2758 will serve to establish the accounting period stated on that
form. Changing to another accounting period requires prior approval of
the IRS.
Generally, an extension of time to file a return does not
extend the time for payment of tax due. You must pay the total
income tax estimated to be due on Form 1041 in full by the regular due
date of the return. For additional information, see the instructions
for Form 2758.
Where to file.
As the personal representative of an estate, file the estate's
income tax return (Form 1041) with the Internal Revenue Service center
for the state where you live or have your principal place of business.
A list of the states and addresses that apply is in the instructions
for Form 1041.
You must send Form 1040NR to the Internal Revenue Service Center,
Philadelphia, PA 19255.
Electronic filing.
Form 1041 can be filed electronically or on magnetic media. See the
instructions for Form 1041 for more information.
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