Estates must file Form 1041 if they earn over $600 in income or have a beneficiary that is a nonresident alien.
Trusts must file Form 1041 any year they earn taxable income, over $600 in gross income, or if they have a beneficiary who is a nonresident alien.
As an example, let’s say a decedent (deceased) owned a rental property and continued to receive payments from it after they died. Since they can no longer collect the money, their estate, which is a separate entity, collects it on their behalf. A representative of the estate, like an executor, must account for this income if it’s over $600 by filing Form 1041 for the estate.
Who files Form 1041?
For estates, the executor or administrator is responsible for filing Form 1041 and any necessary estate tax return.
For irrevocable trusts, the trustee files Form 1041 when applicable during the decedent’s lifetime and after their death.
For revocable trusts, Form 1041 is only necessary after the trust owner dies, and the successor trustee is responsible for filing. During their lifetime, people who set up revocable trusts, also known as grantor trusts, claim the trust income as their own because they technically still own the trust property under IRS rules. After they die, the successor trustee will need to apply for an EIN (employee identification number) for the trust, since it will be the first time the trust files taxes as its own entity.
Learn more about how trusts are taxed.
Executors and trustees are fiduciaries, and they have a legal responsibility to act in the best interest of the estate or trust that they represent.
What is estate and trust income?
For an estate, all assets that generate income from the time of the decedent’s death until administration has closed are considered income. This includes:
Interest income from savings accounts, stocks, bonds, CDs, mutual funds
Ordinary dividends that aren’t distributed to beneficiaries
Capital gains, like from the sale of a house
Rental property income
Wages and salaries paid to the decedent after they passed away for work they did while they were alive
What expenses are deductible?
The executor or trustee can claim deductions when filing Form 1041 to reduce the estate or trust taxable income. Many of the same deductions that individual taxpayers can take are available for estates and trusts.
Expenses that qualify for deductions include:
State and local taxes paid
Executor and trustee fees
Fees paid to attorneys, accountants, and tax preparers
Prepaid mortgage interest and qualified mortgage insurance premiums
Trust income distributed to beneficiaries (attach Schedule K-1)
When to file Form 1041
Estate and trust tax returns are filed based on the calendar year or fiscal year, which have different deadlines. In general, any executor or trustee can opt to file based on the calendar year, but they may not want to if it results in a shortened year (less than 12 months) and doesn’t give them enough time to complete estate or trust administration. If an executor or trustee wants more time than a shortened year allows, they can choose to file according to the fiscal year.
When you file according to the calendar year, you must file by April 15 (Tax Day), the same date by which you file your personal income taxes. The calendar year for an estate runs from the date of the decedent’s death through the end of the year (December 31).
If you’re using the fiscal year for tax returns, the IRS will require you to file Form 1041 by the 15th day of the fourth month after the fiscal year closes. So if the fiscal year closes on June 30, you have until October 15 to file a return. For an estate, the fiscal year starts on the date of the decedent’s death and runs for about 12 months, until the last day of the month before the decedent’s death. So if your fiscal year starts on May 22, it would run until April 30 of the following year. If the filing deadline falls on a weekend or holiday, you must file by the next business day.
How to get a Form 1041 filing extension
If you need more time to file, you can request a 5½-month extension by filling out Form 7004. You can generally file the form electronically with the IRS and the extension is automatic so you will get it as long as you apply properly. Note that this is not the same form you use to request an extension for your personal income tax return.
How to file Form 1041
The estate and trust tax return is similar to the individual tax return (Form 1040) as it calculates income, deductions, and credits to determine how much tax is owed. The 2020 Form 1041 is a three-page form that leads you through every step of the filing process. It begins by asking for basic information about the trust or estate and about who is filing the return. The first page then has three sections, which guide you through calculating the trust or estate's income, tracking deductible expenses, and finally determining how much tax is owed, if any.
The second page includes Schedule A, for reporting charitable expenses; Schedule B for tracking deductions related to any income that was distributed to beneficiaries; and Schedule G for factoring in tax credits and any taxes already paid, such as through estimated tax payments. The final page of Form 1041 covers other tax situations that may affect a trust or estate's tax situation. For example, it asks questions about foreign bank accounts, distributions of S corporation stocks, and any beneficiaries who are skip persons.
The safest way to file Form 1041 is electronically, and the IRS has approved a handful of online filing services that allow you to e-file Form 1041. You can also file Form 1041 by mail. Depending on what state you live in, you will send your return to a different address. Check the Form 1041 instructions for the correct mailing address.