Income Tax Return for Estates and Trusts – Form 1041

What is Form 1041 used for?

If an estate or trust has gross income of $600 or more during a tax year, it must file a tax return. The fiduciary of a domestic decedent’s estate, trust, or bankruptcy estate uses Form 1041 to report:

The income, deductions, gains, losses, etc., of the estate or trust;
The income that is either accumulated or held for future distribution or distributed currently to the beneficiaries;
Any income tax liability of the estate or trust;
Employment taxes on wages paid to household employees; and
Net Investment Income Tax (NIIT). See Schedule G, Part I, line 5, and the Instructions for Form 8960.

A trust or a decedent’s estate is a separate legal entity for federal tax purposes. A decedent’s estate comes into existence at the time of death of an individual. A trust may be created during an individual’s life (inter vivos) or at the time of their death under a will (testamentary). If the trust instrument contains certain provisions, then the person creating the trust (the grantor) is treated as the owner of the trust’s assets. Such a trust is a grantor type trust.

A trust or decedent’s estate figures its gross income in much the same manner as an individual. Most deductions and credits allowed to individuals are also allowed to estates and trusts. However, there is one major distinction. A trust or decedent’s estate is allowed an income distribution deduction for distributions to beneficiaries. To figure this deduction, the fiduciary must complete Schedule B. The income distribution deduction determines the amount of any distributions taxed to the beneficiaries.

For this reason, a trust or decedent’s estate is sometimes referred to as a “pass-through entity.” The beneficiary, and not the trust or decedent’s estate, pays income tax on their distributive share of income. Schedule K-1 (Form 1041) is used to notify the beneficiaries of the amounts to be included on their income tax returns.

Before preparing Form 1041, the fiduciary must figure the accounting income of the estate or trust under the will or trust instrument and applicable local law to determine the amount, if any, of income that is required to be distributed, because the income distribution deduction is based, in part, on that amount.