Other Items of Income

Some other items of income that you, as a survivor or beneficiary, may receive are discussed below. Lump-sum payments you receive as the surviving spouse or beneficiary of a deceased employee may represent accrued salary payments; distributions from employee profit-sharing, pension, annuity, and stock bonus plans; or other items that should be treated separately for tax purposes. The treatment of these lump-sum payments depends on what the payments represent.

If the decedent is a specified terrorist victim (see Important Reminders), certain income received by the beneficiary or the estate is not included in income. See Publication 3920.

Public safety officers.   Special rules apply to certain amounts received because of the death of a public safety officer (law enforcement officers, fire fighters, chaplains, ambulance crews, and rescue squads).

The provisions apply to a chaplain killed in the line of duty after September 10, 2001. The chaplain must have been responding to a fire, rescue, or police emergency as a member or employee of a fire or police department.

Death benefits.   The death benefit payable to eligible survivors of public safety officers who die as a result of traumatic injuries sustained in the line of duty is not included in either the beneficiaries' income or the decedent's gross estate. The benefit is administered through the Bureau of Justice Assistance (BJA).

The BJA can pay the eligible survivors an emergency interim benefit up to $3,000 if it determines that a public safety officer's death is one for which a death benefit will probably be paid. If there is no final payment, the recipient of the interim benefit is liable for repayment. However, the BJA may waive all or part of the repayment if it will cause a hardship. If all or part of the repayment is waived, that amount is not included in income.

Survivor benefits.   Generally, a survivor annuity received by the spouse, former spouse, or child of a public safety officer killed in the line of duty is excluded from the recipient's income. The annuity must be provided under a government plan and is excludable to the extent that it is attributable to the officer's service as a public safety officer.

The exclusion does not apply if the recipient's actions were responsible for the officer's death. It also does not apply in the following circumstances.

• The death was caused by the intentional misconduct of the officer or by the officer's intention to cause such death.
• The officer was voluntarily intoxicated at the time of death.
• The officer was performing his or her duties in a grossly negligent manner at the time of death.

Salary or wages.   Salary or wages paid after the employee's death are usually taxable income to the beneficiary. See Wages, earlier, under Specific Types of Income in Respect of a Decedent.

Rollover distributions.   An employee's surviving spouse who receives an eligible rollover distribution may roll it over tax free into an IRA, a qualified plan, a section 403 annuity, or a section 457 plan. A distribution to a beneficiary other than the employee's surviving spouse is not an eligible rollover distribution and is subject to tax. If the decedent was born before 1936, the beneficiary may be able to use optional methods to figure the tax on the distribution. For more information, see Publication 575, Pension and Annuity Income.

Pensions and annuities.   For beneficiaries who receive pensions and annuities, see Publication 575. For beneficiaries of federal Civil Service employees or retirees, see Publication 721, Tax Guide to U.S. Civil Service Retirement Benefits.

Inherited IRAs.   If a person other than the decedent's spouse inherits the decedent's traditional IRA or Roth IRA, that person cannot treat the IRA as one established on his or her behalf. If a distribution from a traditional IRA is from contributions that were deducted or from earnings and gains in the IRA, it is fully taxable income. If there were nondeductible contributions, an allocation between taxable and nontaxable income must be made. For information on distributions from a Roth IRA, see the discussion earlier under Income in Respect of the Decedent. The inherited IRA cannot be rolled over into, or receive a rollover from, another IRA. No deduction is allowed for amounts paid into that inherited IRA. For more information about IRAs, see Publication 590.

Estate income.   Estates may have to pay federal income tax. Beneficiaries may have to pay tax on their share of estate income. However, there is never a double tax. See Distributions to Beneficiaries From an Estate, later.

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). A nonresident alien beneficiary that gives you a withholding certificate generally must provide you with a TIN (see Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities). 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, the income 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 may have to file the income tax return (Form 1040NR) and pay the tax for 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, and Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, to report and transmit withheld tax on distributable net income (discussed later) actually distributed. This applies to the extent the distribution consists of an amount subject to withholding. For more information, see Publication 515.

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 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.) 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.

If the decedent is a specified terrorist victim (see Important Reminders), certain income received by the estate is not included in income. See the Form 1041 instructions and Publication 3920.

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 as well as 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. That 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.

1. The distribution satisfies the beneficiary's right to receive either -
   1. A specific dollar amount (whether payable in cash, in unspecified property, or in both), or
   2. A specific property other than the property distributed.
2. You choose to recognize the gain or loss on the estate's income tax return (section 643(e)(3) election).

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. However, 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 transaction on 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.

Under the related persons rules, you cannot claim a loss for property distributed to a beneficiary unless the distribution is in discharge of a pecuniary bequest. Also, any gain on the distribution of depreciable property is ordinary income.

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