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. The 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 for 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 2003, 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 2003. 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 2003 return, or
- 100% of the tax shown on the 2002 return (assuming the return covered all 12 months).
The percentage in (2) above is 110% if the estate's 2002 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 15, 2003. You can either pay all of your estimated tax at that time or pay it in four equal amounts that are due by April 15, 2003; June 16, 2003; September 15, 2003; and January 15, 2004. 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 payment must be made by 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). You can use Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, to figure any penalty, or you can let the IRS figure the 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. You can check a box in the signature area that authorizes the IRS to contact that paid preparer for certain information. See the instructions for Form 1041 for more information.
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 2002 is due by April 15, 2003 (June 16, 2003, 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 form must be filed by 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 by 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.
Distributions to Beneficiaries From an Estate
If you are the beneficiary of an estate that must distribute all its income currently, you must report your share of the distributable net income whether or not you have actually received it.
If you are the beneficiary of an estate that does not have to distribute all its income currently, you must report all income that must be distributed to you (whether or not actually distributed) plus all other amounts paid, credited, or required to be distributed to you, up to your share of distributable net income. As explained earlier in Distributions Deduction under Income Tax Return of an Estate - Form 1041, for an amount to be currently distributable income, there must be a specific requirement for current distribution either under local law or the terms of the decedent's will. If there is no such requirement, the income is reportable only when distributed.
If the estate has more than one beneficiary, the separate shares rule discussed earlier under Distributions Deduction may have to be used to determine the distributable net income allocable to each beneficiary. The beneficiaries in the examples shown next do not meet the requirements of the separate shares rule.
Income That Must Be Distributed Currently
Beneficiaries who are entitled to receive currently distributable income generally must include in gross income the entire amount due them. However, if the currently distributable income is more than the estate's distributable net income figured without deducting charitable contributions, each beneficiary must include in gross income a ratable part of the distributable net income.
Example. Under the terms of the will of Gerald Peters, $5,000 a year is to be paid to his widow and $2,500 a year is to be paid to his daughter out of the estate's income during the period of administration. There are no charitable contributions. For the year, the estate's distributable net income is only $6,000. The distributable net income is less than the currently distributable income, so the widow must include in her gross income only $4,000 [($5,000 ÷ $7,500) × $6,000], and the daughter must include in her gross income only $2,000 [($2,500 ÷ $7,500) × $6,000].
Annuity payable out of income or corpus. Income that must be distributed currently includes any amount that must be paid out of income or corpus (principal of the estate) to the extent the amount is satisfied out of income for the tax year. An annuity that must be paid in all events (either out of income or corpus) would qualify as income that must be distributed currently to the extent there is income of the estate not paid, credited, or required to be distributed to other beneficiaries for the tax year.
Example 1. Henry Frank's will provides that $500 be paid to the local Community Chest out of income each year. It also provides that $2,000 a year is currently distributable out of income to his brother, Fred, and an annuity of $3,000 is to be paid to his sister, Sharon, out of income or corpus. Capital gains are allocable to corpus, but all expenses are to be charged against income. Last year, the estate had income of $6,000 and expenses of $3,000. The personal representative paid the $500 to the Community Chest and made the distributions to Fred and Sharon as required by the will.
The estate's distributable net income (figured before the charitable contribution) is $3,000. The currently distributable income totals $2,500 ($2,000 to Fred and $500 to Sharon). The income available for Sharon's annuity is only $500 because the will requires that the charitable contribution be paid out of current income. The $2,500 treated as distributed currently is less than the $3,000 distributable net income (before the contribution), so Fred must include $2,000 in his gross income and Sharon must include $500 in her gross income.
Example 2. Assume the same facts as in Example 1 except that the estate has an additional $1,000 of administration expenses, commissions, etc., that are chargeable to corpus. The estate's distributable net income (figured before the charitable contribution) is now $2,000 ($3,000 - $1,000 additional expense). The amount treated as currently distributable income is still $2,500 ($2,000 to Fred and $500 to Sharon). The $2,500, treated as distributed currently, is more than the $2,000 distributable net income, so Fred has to include only $1,600 [($2,000 ÷ $2,500) × $2,000] in his gross income and Sharon has to include only $400 [($500 ÷ $2,500) × $2,000] in her gross income. Fred and Sharon are beneficiaries of amounts that must be distributed currently, so they do not benefit from the reduction of distributable net income by the charitable contribution deduction.
Other Amounts Distributed
Any other amount paid, credited, or required to be distributed to the beneficiary for the tax year also must be included in the beneficiary's gross income. Such an amount is in addition to those amounts that must be distributed currently, as discussed earlier. It does not include gifts or bequests of specific sums of money or specific property if such sums are paid in three or fewer installments. However, amounts that can be paid only out of income are not excluded under this rule. If the sum of the income that must be distributed currently and other amounts paid, credited, or required to be distributed exceeds distributable net income, these other amounts are included in the beneficiary's gross income only to the extent distributable net income exceeds the income that must be distributed currently. If there is more than one beneficiary, each will include in gross income only a pro rata share of such amounts.
The personal representative can elect to treat distributions paid or credited by the estate 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 following are examples of other amounts distributed.
- Distributions made at the discretion of the personal representative.
- Distributions required by the terms of the will upon the happening of a specific event.
- Annuities that must be paid in any event, but only out of corpus (principal).
- Distributions of property in kind as defined earlier in Distributions Deduction under Income Tax Return of an Estate - Form 1041.
- Distributions required for the support of the decedent's surviving spouse or other dependent for a limited period, but only out of corpus (principal).
If an estate distributes property in kind, the amount of the distribution ordinarily is the lesser of the estate's basis in the property or the property's fair market value when distributed. However, the amount of the distribution is the property's fair market value if the estate recognizes gain on the distribution. See Gain or loss on distributions in kind in the discussion Income To Include under Income Tax Return of an Estate - Form 1041, earlier.
Example. The terms of Michael Scott's will require the distribution of $2,500 of income annually to his wife, Susan. If any income remains, it may be accumulated or distributed to his two children, Joe and Alice, in amounts at the discretion of the personal representative. The personal representative also may invade the corpus (principal) for the benefit of Scott's wife and children.
Last year, the estate had income of $6,000 after deduction of all expenses. Its distributable net income is also $6,000. The personal representative distributed the required $2,500 of income to Susan. In addition, the personal representative distributed $1,500 each to Joe and Alice and an additional $2,000 to Susan.
Susan includes in her gross income the $2,500 of currently distributable income. The other amounts distributed totaled $5,000 ($1,500 + $1,500 + $2,000) and are includible in the income of Susan, Joe, and Alice to the extent of $3,500 (distributable net income of $6,000 minus currently distributable income to Susan of $2,500). Susan will include an additional $1,400 [($2,000 ÷ $5,000) × $3,500] in her gross income. Joe and Alice each will include $1,050 [($1,500 ÷ $5,000) × $3,500] in their gross incomes.
Discharge of a Legal Obligation
If an estate, under the terms of a will, discharges a legal obligation of a beneficiary, the discharge is included in that beneficiary's income as either currently distributable income or other amount paid. This does not apply to the discharge of a beneficiary's obligation to pay alimony or separate maintenance.
The beneficiary's legal obligations include a legal obligation of support, for example, of a minor child. Local law determines a legal obligation of support.
Character of Distributions
An amount distributed to a beneficiary for inclusion in gross income retains the same character for the beneficiary that it had for the estate.
No charitable contribution made. If no charitable contribution is made during the tax year, you must treat the distributions 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. Distributable net income was defined earlier in Distributions Deduction under Income Tax Return of an Estate - Form 1041. However, if the will or local law specifically provides or requires a different allocation, you must use that allocation.
Example 1. An estate has distributable net income of $3,000, consisting of $1,800 in rents and $1,200 in taxable interest. There is no provision in the will or local law for the allocation of income. The personal representative distributes $1,500 each to Jim and Ted, beneficiaries under their father's will. Each will be treated as having received $900 in rents and $600 of taxable interest.
Example 2. Assume in Example 1 that the will provides for the payment of the taxable interest to Jim and the rental income to Ted and that the personal representative distributed the income under those provisions. Jim is treated as having received $1,200 in taxable interest and Ted is treated as having received $1,800 of rental income.
Charitable contribution made. If a charitable contribution is made by an estate and the terms of the will or local law provide for the contribution to be paid from specified sources, that provision governs. If no provision or requirement exists, the charitable contribution deduction must be allocated among the classes of income entering into the computation of the income of the estate before allocation of other deductions among the items of distributable net income. In allocating items of income and deductions to beneficiaries to whom income must be distributed currently, the charitable contribution deduction is not taken into account to the extent that it exceeds income for the year reduced by currently distributable income.
Example. The will of Harry Thomas requires a current distribution out of income of $3,000 a year to his wife, Betty, during the administration of the estate. The will also provides that the personal representative, using discretion, may distribute the balance of the current earnings either to Harry's son, Tim, or to one or more of certain designated charities. Last year, the estate's income consisted of $4,000 of taxable interest and $1,000 of tax-exempt interest. There were no deductible expenses. The personal representative distributed the $3,000 to Betty, made a contribution of $2,500 to the local heart association, and paid $1,500 to Tim.
The distributable net income for determining the character of the distribution to Betty is $3,000. The charitable contribution deduction to be taken into account for this computation is $2,000 (the estate's income ($5,000) minus the currently distributable income ($3,000)). The $2,000 charitable contribution deduction must be allocated: $1,600 [($4,000 ÷ $5,000) × $2,000] to taxable interest and $400 [($1,000 ÷ $5,000) × $2,000] to tax-exempt interest. Betty is considered to have received $2,400 ($4,000 - $1,600) of taxable interest and $600 ($1,000 - $400) of tax-exempt interest. She must include the $2,400 in her gross income. She must report the $600 of tax-exempt interest, but it is not taxable.
To determine the amount to be included in Tim's gross income, however, take into account the entire charitable contribution deduction. The currently distributable income is greater than the estate's income after taking into account the charitable contribution deduction, so none of the amount paid to Tim must be included in his gross income for the year.
How and When To Report
How you report your income from the estate depends on the character of the income in the hands of the estate. When you report the income depends on whether it represents amounts credited or required to be distributed to you or other amounts.
How to report estate income. Each item of income keeps the same character in your hands as it had in the hands of the estate. If the items of income distributed or considered to be distributed to you include dividends, tax-exempt interest, or capital gains, they will keep the same character in your hands for purposes of the tax treatment given those items. Generally, you report the dividends on line 9 of your Form 1040, and the capital gains on your Schedule D (Form 1040). The tax-exempt interest, while not included in taxable income, must be shown on line 8b of your Form 1040. Report business and other nonpassive income in Part III of your Schedule E (Form 1040).
The estate's personal representative should provide you with the classification of the various items that make up your share of the estate income and the credits you should take into consideration so that you can properly prepare your individual income tax return. See Schedule K-1 (Form 1041), later.
When to report estate income. If income from the estate is credited or must be distributed to you for a tax year, report that income (even if not distributed) on your return for that year. 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. If this election is made, you must report that distribution on your return for that year.
Report other income from the estate on your return for the year in which you receive it. If your tax year is different from the estate's tax year, see Different tax years, next.
Different tax years. You must include your share of the estate income in your return for your tax year in which the last day of the estate's tax year falls. If the tax year of the estate is the calendar year and your tax year is a fiscal year ending on June 30, you will include in gross income for the tax year ended June 30 your share of the estate's distributable net income distributed or considered distributed during the calendar year ending the previous December 31.
Death of individual beneficiary. If an individual beneficiary dies, the beneficiary's share of the estate's distributable net income may be distributed or be considered distributed by the estate for its tax year that does not end with or within the last tax year of the beneficiary. In this case, the estate income that must be included in the gross income on the beneficiary's final return is based on the amounts distributed or considered distributed during the tax year of the estate in which his or her last tax year ended. However, for a cash basis beneficiary, the gross income of the last tax year includes only the amounts actually distributed before death. Income that must be distributed to the beneficiary but, in fact, is distributed to the beneficiary's estate after death is included in the gross income of the beneficiary's estate as income in respect of a decedent.
Termination of nonindividual beneficiary. If a beneficiary that is not an individual, for example a trust or a corporation, ceases to exist, the amount included in its gross income for its last tax year is determined as if the beneficiary were a deceased individual. However, income that must be distributed before termination, but which is actually distributed to the beneficiary's successor in interest, is included in the gross income of the nonindividual beneficiary for its last tax year.
Schedule K-1 (Form 1041). The personal representative for the estate must provide you with a copy of Schedule K-1 (Form 1041) or a substitute Schedule K-1. You should not file the form with your Form 1040, but should keep it for your personal records.
Each beneficiary (or nominee of a beneficiary) who receives a distribution from the estate for the tax year or to whom any item is allocated must receive a Schedule K-1 or substitute. The personal representative handling the estate must furnish the form to each beneficiary or nominee by the date on which the Form 1041 is filed.
Nominees. A person who holds an interest in an estate as a nominee for a beneficiary must provide the estate with the name and address of the beneficiary, and any other required information. The nominee must provide the beneficiary with the information received from the estate.
Penalty. A personal representative (or nominee) who fails to provide the correct information may be subject to a $50 penalty for each failure.
Consistent treatment of items. You must treat estate items the same way on your individual return as they are treated on the estate's income tax return. If your treatment is different from the estate's treatment, you must file Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR), with your return to identify the difference. If you do not file Form 8082 and the estate has filed a return, the IRS can immediately assess and collect any tax and penalties that result from adjusting the item to make it consistent with the estate's treatment.
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