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Posted by R. C. White on January 28, 2008, 4:48 pm
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Hi, Kupchik.
An estate with $6K of dividend income in a year is large enough to benefit
from professional help, in many cases. As I said, "some very complicated
questions are buried just beneath the surface of what appear to be very
simple situations." The "tax-free interest" might also indicate some
complications. (Page 28 of the 52-page official instructions for Form 1041
says, "If the estate or trust received tax-exempt income, figure the
allocation of expenses between tax-exempt and taxable income on a separate
sheet and attach it to the return.") The mechanical preparation of the
return is the easy part. But there are some important decisions that need
to be made, and those require some understanding of probate accounting and
tax rules.
For example, I was able to save significant taxes for several estates and
their beneficiaries simply by careful selection of the fiscal year-end for
the estate. Often, ending the estate's year just before final distribution
saves the heirs by letting the estate pay tax at low rates on the income
while passing through final-year deductions (and already-taxed income) to
the heirs, who may be able to benefit from those deductions at high tax
rates.
(Quickie example: Estate has gross income of $6,000. An estate gets an
annual exemption of $600, except in its final year, leaving $5,400 taxable
at 15% to 28%, total $1,147. Individual tax on the whole $6,000 at 35%
would be $2,100, leaving them $3,900 after tax. Ending the estate's taxable
year just before final distribution would let it distribute the $6,000 -
$1,147 = $4,853 tax-free to the heirs. Also, the heirs probably would be
able to deduct the estate's expenses as "excess deductions on termination"
of the estate as an itemized deduction, saving them even more individual
income taxes; see page 49 of the official instructions for Form 1041.)
Not always, of course, because each situation is unique. But a CPA who is
competent and experienced in estate matters can often spot savings
opportunities that simply would not occur to most tax preparers - not even
to most CPAs, who don't work with estates and trusts that often.
Don't forget the word "fiduciary". The executor has a duty, which will be
enforced by a court, to act for the benefit of all the heirs. One of the
duties is to act as "a prudent man" would act in preserving the estate's
property, including avoiding unnecessary tax burdens on the estate and
heirs. Simply carrying out the mechanical functions of preparing forms may
not be sufficient to convince the judge - or the heirs - that the fiduciary
responsibility has been met. As they say, "Where there's a will, there's a
will contest."
Does the estate already have a CPA? Does it have an attorney who might
recommend a CPA who is familiar with local probate matters?
As I said, I've been retired so long that I don't know what the current
rules are, so check with our own CPA to be sure.
RC
--
R. C. White, CPA
San Marcos, TX
(Retired. No longer licensed to practice public accounting.)
rc@grandecom.net
Microsoft Windows MVP
(Currently running Quicken 2008 Deluxe in Vista Ultimate x64)
>> Hi, Kupchik.
>>
>> You mean 1041 Estate Income Taxes.
>>
>> A very subtle - but important - point: Estate tax generally is used when
>> talking about the tax on the value of the estate at the time of death.
>> What
>> you are asking about is the income tax on the estate's income after the
>> date
>> of death. Your question is clearly about the tax on the estate's income,
>> not on the value of the estate. When you say "estate tax" without
>> including
>> the word "income", a tax professional will automatically think you mean
>> the
>> date-of-death tax. And adding "1041" sounds ambiguous and leaves us
>> wondering.
>>
>> For several years, I taught short courses and seminars for other CPAs for
>> the California and Oklahoma CPA Societies. One topic was the Federal
>> Estate
>> Tax, for which Form 706 is filed. The other was Federal Income Taxes of
>> Estates and Trusts, reported on Form 1041. Each of the taxes provides
>> plenty of grounds for questions, obviously related, but quite different.
>> Also, while they are covered by the same form and many of the same rules,
>> the income taxation of estates and of trusts have many significant
>> differences. Trustees and executors (by whatever title) are both
>> "fiduciaries", who are bound by law to put the interests of the trust or
>> estate above their own, so the Form 1041 is called the Fiduciary Income
>> Tax
>> Return.
>>
>> Just like individual income tax returns, estate income tax returns can
>> range
>> from the very simple to extremely complex. And some very complicated
>> questions are buried just beneath the surface of what appear to be very
>> simple situations. When I retired in the early 1990s, TurboTax and
>> several
>> other products were available for both "do-it-yourself" and professional
>> individual income tax return preparation. There were no good consumer
>> products for preparation of either Form 706 or Form 1041. There were
>> professional-level products for both kinds of tax planning and return
>> preparation, but they were quite complex and very expensive. I don't
>> know
>> anything about current products, but I would expect the situation to be
>> much
>> the same: consumer products for the very simplest returns, and
>> professional
>> products for all but the simplest situations. And, without professional
>> advice, many (most?) executors and trustees will not recognize when their
>> situations have become too complex for the simple products.
>>
>> Athttp://turbotax.intuit.com/support/kb/update/form-availability/2231.html
>> there is a list of "2007 Federal Forms for Business Returns", including
>> Form
>> 1041. This seems to me a strange place to list 1041, but I suppose it is
>> here because most consumers are never concerned with this form so Intuit
>> keeps it separate from the 1040 listings. I don't see a price here, but
>> the
>> listing for 2006 lists it at $99.95. A Google search for "1041 returns"
>> gets about 594,000 hits; adding "turbotax" narrows it down to 2300.
>>
>> Serving as an executor is an awesome responsibility. I hope you have
>> some
>> competent advisors to help you through this job.
>>
>> Remember, I've been retired for more than a decade. Always check with
>> your
>> own CPA for the current rules.
>>
>> RC
>>
>>
>>
>>
>>
>> > Are there any Turbo Tax or Tax Cut products that will handle a 1041
>> > for Estate Taxes? If have a very simple one to file with a small
>> > amount of dividends and tax-free interest and a few expenses. Will
>> > they create K-1s?- Hide quoted text -
>>
>> - Show quoted text -
>
> R.C. & Fred, thanks for the info.
>
> J.C., you are correct I was referring to the 1041 Estate Income Tax.
> I spent many hours reviewing the instructions and I seems that in my
> situation, it might be do-able by hand. The estate income was only
> about $6k of dividends and a small amount of tax free interest. It
> looks like I just fill out the 1041showing all income distributed to
> the beneficiares (taking this as a deduction off the 1041 income) and
> issue each their part of the income on a K-1. There would not be any
> tax owed on the 1041 K-1 and each beneficary would pay their portion
> on their 1040.
>
> Any comments would be greatly appreciated!
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