How to Prepare an Estate Income Tax Return
An estate is created every time a legal owner of property dies. If the estate earns income between the time of its creation and the time the last of the property of the estate is distributed to beneficiaries (usually heirs and creditors), this income is subject to federal estate tax. The fiduciary of the estate (normally the executor) is required to file IRS Form 1041 on behalf of the estate and to pay the tax out of the estate's assets.
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Instructions
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Collect all of the estate's financial records for the tax year.
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Determine if any of the the individual estate beneficiaries were neither a U.S. citizen nor a permanent resident of the United States during the tax year. If so, Form 1041 must be filed regardless of whether it earned any income during the tax year.
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Calculate the estate's total income during the tax year including business income, interest income, royalties, rents, dividends and any other income from any source anywhere in the world. If the property owner died during the tax year, do not include income generated by estate property before the property owner died. If the estate's gross income during the tax year was at least $600, Form 1041 must be filed even if all beneficiaries are U.S. citizens or permanent residents.
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Calculate allowable deductions from the estate's taxable income. These deductions include fees paid to the fiduciary, legal fees, state and local taxes, charitable donations and other items. Subtract these from the estate's total income to arrive at the estate's adjusted total income or loss.
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Deduct distributions to beneficiaries and the standard estate tax deduction in order to determine the estate's taxable income. If the result is negative, the estate's taxable income is zero, and no estate tax will be due.
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Check Schedule G, Line 7 of Form 1041 for the estate tax rate table. Apply the applicable tax rate (based on taxable income) to calculate the estate's total tax.
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Subtract from the estate's total tax any taxes already paid by the estate on income generated during the tax year. These include withheld taxes and quarterly estimated tax payments. The remainder, if any, is the estate's total tax due.
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Sign Form 1041 and submit it with any tax due to the appropriate IRS service center. A list of IRS service centers and the areas they serve are included in the Form 1041 instructions (see References).
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Tips & Warnings
E-filing is a convenient alternative to filing by mail (see Resources).
An estate is not excused from the requirement of filing Form 1041 simply because it owes no estate tax. The IRS will still expect to receive it for informational purposes.
