Table of Contents
- Purpose of Form
- Income Taxation of Trusts and Decedents' Estates
- Abusive Trust Arrangements
- Definitions
- Who Must File
- Special Filing Instructions for Grantor Type Trusts, Pooled Income Funds, and Electing Small Business Trusts
- Electronic Filing
- When To File
- Period Covered
- Who Must Sign
- Accounting Methods
- Accounting Periods
- Rounding Off to Whole Dollars
- Estimated Tax
- Interest and Penalties
- Other Forms That May Be Required
- Additional Information
- Assembly and Attachments
- Of Special Interest to Bankruptcy Trustees and Debtors-in-Possession
- Taxation of Bankruptcy Estates of an Individual
- Who Must File
- Employer Identification Number
- Accounting Period
- When To File
- Disclosure of Return Information
- Transfer of Tax Attributes From the Individual Debtor to the Bankruptcy Estate
- Income, Deductions, and Credits
- Tax Rate Schedule
- Prompt Determination of Tax Liability
- Special Filing Instructions for Bankruptcy Estates
The fiduciary of a domestic decedent's estate, trust, or bankruptcy estate uses Form 1041 to report:
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The income, deductions, gains, losses, etc. of the estate or trust;
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The income that is either accumulated or held for future distribution or distributed currently to the beneficiaries;
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Any income tax liability of the estate or trust; and
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Employment taxes on wages paid to household employees.
A trust (except a grantor type 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 his or her 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. See page 6 for special rules for grantor trusts.
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 sometimes is referred to as a “pass-through” entity. The beneficiary, and not the trust or decedent's estate, pays income tax on his or her 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.
Certain trust arrangements purport to reduce or eliminate federal taxes in ways that are not permitted under the law. Abusive trust arrangements typically are promoted by the promise of tax benefits with no meaningful change in the taxpayer's control over or benefit from the taxpayer's income or assets. The promised benefits may include reduction or elimination of income subject to tax; deductions for personal expenses paid by the trust; depreciation deductions of an owner's personal residence and furnishings; a stepped-up basis for property transferred to the trust; the reduction or elimination of self-employment taxes; and the reduction or elimination of gift and estate taxes. These promised benefits are inconsistent with the tax rules applicable to trust arrangements.
Abusive trust arrangements often use trusts to hide the true ownership of assets and income or to disguise the substance of transactions. These arrangements frequently involve more than one trust, each holding different assets of the taxpayer (for example, the taxpayer's business, business equipment, home, automobile, etc.). Some trusts may hold interests in other trusts, purport to involve charities, or are foreign trusts. Funds may flow from one trust to another trust by way of rental agreements, fees for services, purchase agreements, and distributions.
Some of the abusive trust arrangements that have been identified include unincorporated business trusts (or organizations), equipment or service trusts, family residence trusts, charitable trusts, and final trusts. In each of these trusts, the original owner of the assets that are nominally subject to the trust effectively retains the authority to cause financial benefits of the trust to be directly or indirectly returned or made available to the owner. For example, the trustee may be the promoter, or a relative or friend of the owner who simply carries out the directions of the owner whether or not permitted by the terms of the trust.
When trusts are used for legitimate business, family, or estate planning purposes, either the trust, the beneficiary, or the transferor to the trust will pay the tax on income generated by the trust property. Trusts cannot be used to transform a taxpayer's personal, living, or educational expenses into deductible items, and cannot seek to avoid tax liability by ignoring either the true ownership of income and assets or the true substance of transactions. Therefore, the tax results promised by the promoters of abusive trust arrangements are not allowable under the law, and the participants in and promoters of these arrangements may be subject to civil or criminal penalties in appropriate cases.
For more details, including the legal principles that control the proper tax treatment of these abusive trust arrangements, see Notice 97-24, 1997-1 C.B. 409.
For additional information about abusive tax arrangements, visit the IRS website at www.irs.gov and type in the keyword “Scams” in the search box.
The income distribution deduction allowable to estates and trusts for amounts paid, credited, or required to be distributed to beneficiaries is limited to DNI. This amount, which is figured on Schedule B, line 7, is also used to determine how much of an amount paid, credited, or required to be distributed to a beneficiary will be includible in his or her gross income.
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All accrued income of a decedent who reported his or her income on the cash method of accounting,
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Income accrued solely because of the decedent's death in the case of a decedent who reported his or her income on the accrual method of accounting, and
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Income to which the decedent had a contingent claim at the time of his or her death.
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Deferred salary payments that are payable to the decedent's estate,
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Uncollected interest on U.S. savings bonds,
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Proceeds from the completed sale of farm produce, and
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The portion of a lump-sum distribution to the beneficiary of a decedent's IRA that equals the balance in the IRA at the time of the owner's death. This includes unrealized appreciation and income accrued to that date, less the aggregate amount of the owner's nondeductible contributions to the IRA. Such amounts are included in the beneficiary's gross income in the tax year that the distribution is received.
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Business expenses deductible under section 162.
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Interest deductible under section 163.
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Taxes deductible under section 164.
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Investment expenses described in section 212 (in excess of 2% of adjusted gross income (AGI)).
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Percentage depletion allowed under section 611.
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Foreign tax credit.
Income required to be distributed currently is income that is required under the terms of the governing instrument and applicable local law to be distributed in the year it is received. The fiduciary must be under a duty to distribute the income currently, even if the actual distribution is not made until after the close of the trust's tax year. See Regulations section 1.651(a)-2.
A fiduciary is a trustee of a trust; or an executor, executrix, administrator, administratrix, personal representative, or person in possession of property of a decedent's estate.
A trust is an arrangement created either by a will or by an inter vivos declaration by which trustees take title to property for the purpose of protecting or conserving it for the beneficiaries under the ordinary rules applied in chancery or probate courts.
A revocable living trust is an arrangement created by a written agreement or declaration during the life of an individual and can be changed or ended at any time during the individual's life. A revocable living trust is generally created to manage and distribute property. Many people use this type of trust instead of (or in addition to) a will.
Because this type of trust is revocable, it is treated as a grantor type trust for tax purposes. See Grantor Type Trusts later for special filing instructions that apply to grantor type trusts.
The fiduciary (or one of the joint fiduciaries) must file Form 1041 for a domestic estate that has:
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Gross income for the tax year of $600 or more, or
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A beneficiary who is a nonresident alien.
An estate is a domestic estate if it is not a foreign estate. A foreign estate is one the income of which is from sources outside the United States that is not effectively connected with the conduct of a U.S. trade or business and is not includible in gross income. If you are the fiduciary of a foreign estate, file Form 1040NR, U.S. Nonresident Alien Income Tax Return, instead of Form 1041.
The fiduciary (or one of the joint fiduciaries) must file Form 1041 for a domestic trust taxable under section 641 that has:
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Any taxable income for the tax year,
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Gross income of $600 or more (regardless of taxable income), or
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A beneficiary who is a nonresident alien.
Two or more trusts are treated as one trust if such trusts have substantially the same grantor(s) and substantially the same primary beneficiary(ies) and a principal purpose of such trusts is avoidance of tax. This provision applies only to that portion of the trust that is attributable to contributions to corpus made after March 1, 1984.
A trust is a domestic trust if:
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A U.S. court is able to exercise primary supervision over the administration of the trust (court test), and
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One or more U.S. persons have the authority to control all substantial decisions of the trust (control test).
See Regulations section 301.7701-7 for more information on the court and control tests.
Also treated as a domestic trust is a trust (other than a trust treated as wholly owned by the grantor) that:
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Was in existence on August 20, 1996,
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Was treated as a domestic trust on August 19, 1996, and
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Elected to continue to be treated as a domestic trust.
A trust that is not a domestic trust is treated as a foreign trust. If you are the trustee of a foreign trust, file Form 1040NR instead of Form 1041. Also, a foreign trust with a U.S. owner generally must file Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner.
If a domestic trust becomes a foreign trust, it is treated under section 684 as having transferred all of its assets to a foreign trust, except to the extent a grantor or another person is treated as the owner of the trust when the trust becomes a foreign trust.
Section 645 provides that if both the executor (if any) of an estate (the related estate) and the trustee of a qualified revocable trust (QRT) elect the treatment in section 645, the trust must be treated and taxed as part of the related estate during the election period. This election may be made by a QRT even if no executor is appointed for the related estate.
In general, Form 8855, Election To Treat a Qualified Revocable Trust as Part of an Estate, must be filed by the due date for Form 1041 for the first tax year of the related estate. This applies even if the combined related estate and electing trust do not have sufficient income to be required to file Form 1041. However, if the estate is granted an extension of time to file Form 1041 for its first tax year, the due date for Form 8855 is the extended due date.
Once made, the election is irrevocable.
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The day on which the electing trust and related estate, if any, distribute all of their assets, or
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The day before the applicable date.
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An executor was appointed and agreed to the election after the electing trust made a valid section 645 election, and the electing trust had filed a return as an estate under the trust's TIN, or
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No executor was appointed and the QRT was the filing trust (as explained later).
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The executor of the related estate is responsible for filing Form 1041 for the estate and all electing trusts. The return is filed under the name and TIN of the related estate. Be sure and check the Decedent's estate box at the top of Form 1041. The executor continues to file Form 1041 during the election period even if the estate distributes all of its assets before the end of the election period.
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The Form 1041 includes all items of income, deduction, and credit for the estate and all electing trusts.
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The executor must attach a statement to Form 1041 providing the following information for each electing trust: (a) the name of the electing trust, (b) the TIN of the electing trust, and (c) the name and address of the trustee of the electing trust.
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The related estate and the electing trust are treated as separate shares for purposes of computing DNI and applying distribution provisions. Also, each of those shares can contain two or more separate shares. For more information, see Separate share rule on page 25 and Regulations section 1.645-1(e)(2)(iii).
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The executor is responsible for insuring that the estate's share of the combined tax obligation is paid.
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To timely provide the executor with all the trust information necessary to allow the executor to file a complete, accurate, and timely Form 1041.
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To ensure that the electing trust's share of the combined tax liability is paid.
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The tax year of the electing trust closes on the last day of the election period, and the Form 1041 filed for that tax year includes all items of income, deduction, and credit for the electing trust for the period beginning with the first day of the tax year and ending with the last day of the election period.
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The deemed distribution rules discussed above apply.
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Check the box to indicate that this Form 1041 is a final return.
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If the filing trust continues after the termination of the election period, the trustee must obtain a new TIN. If the trust meets the filing requirements, the trustee must file a Form 1041 under the new TIN for the period beginning with the day after the close of the election period and, in general, ending December 31 of that year.
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If the trust will not continue after the close of the election period, the trustee must file a Form 1041 under the name and TIN of the trust. Complete the entity information and items A, C, D, and F. Indicate in item F that this is a final return. Do not report any items of income, deduction, or credit.
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If the trust will continue after the close of the election period, the trustee must file a Form 1041 for the trust for the tax year beginning the day after the close of the election period and, in general, ending December 31 of that year. Use the TIN obtained after the decedent's death. Follow the general rules for completing the return.
The trustee of an Alaska Native Settlement Trust may elect the special tax treatment for the trust and its beneficiaries provided for in section 646. The election must be made by the due date (including extensions) for filing the trust's tax return for its first tax year ending after June 7, 2001. Do not use Form 1041. Use Form 1041-N, U.S. Income Tax Return for Electing Alaska Native Settlement Trusts, to make the election. Additionally, Form 1041-N is the trust's income tax return and satisfies the section 6039H information reporting requirement for the trust.
The bankruptcy trustee or debtor-in- possession must file Form 1041 for the estate of an individual involved in bankruptcy proceedings under chapter 7 or 11 of title 11 of the United States Code if the estate has gross income for the tax year of $8,750 or more. See Of Special Interest To Bankruptcy Trustees and Debtors-in-Possession on page 12 for details.
Do not file Form 1041 for a common trust fund maintained by a bank. Instead, the fund may use Form 1065, U.S. Return of Partnership Income, for its return. For more details, see section 584 and Regulations section 1.6032-1.
The trustee of a designated or qualified settlement fund (QSF) generally must file Form 1120-SF, U.S. Income Tax Return for Settlement Funds, instead of Form 1041.
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Name,
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Address,
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Taxpayer identification number, and
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A statement that he or she will treat the qualified settlement fund as a grantor type trust.
A trust is a grantor trust if the grantor retains certain powers or ownership benefits. This can also apply to only a portion of a trust. See Grantor Type Trust on page 15 for details on what makes a trust a grantor trust.
In general, a grantor trust is ignored for tax purposes and all of the income, deductions, etc., are treated as belonging directly to the grantor. This also applies to any portion of a trust that is treated as a grantor trust.
File Form 1041 for a grantor trust unless you use an optional filing method.
If the entire trust is a grantor trust, fill in only the entity portion of Form 1041. Do not show any dollar amounts on the form itself; show dollar amounts only on an attachment to the form. Do not use Schedule K-1 (Form 1041) as the attachment.
If only part of the trust is treated as a grantor trust, report on Form 1041 only the part of the income, deductions, etc., that is taxable to the trust. The amounts that are taxable directly to the grantor are shown only on an attachment to the form. Do not use Schedule K-1 (Form 1041) as the attachment.
Also, the fiduciary must give the grantor (owner) of the trust a copy of the attachment.
On the attachment, report:
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The name, identifying number, and address of the person(s) to whom the income is taxable;
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The income of the trust that is taxable to the grantor or another person under sections 671 through 678. Report the income in the same detail as it would be reported on the grantor's return had it been received directly by the grantor; and
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Any deductions or credits that apply to this income. Report these deductions and credits in the same detail as they would be reported on the grantor's return had they been received directly by the grantor.
The income taxable to the grantor or another person under sections 671 through 678 and the deductions and credits that apply to that income must be reported by that person on their own income tax return.
Generally, if a trust is treated as owned by one grantor or other person, the trustee may choose Optional Method 1 or Optional Method 2 as the trust's method of reporting instead of filing Form 1041. A husband and wife will be treated as one grantor for purposes of these two optional methods if:
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All of the trust is treated as owned by the husband and wife, and
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The husband and wife file their income tax return jointly for that tax year.
Generally, if a trust is treated as owned by two or more grantors or other persons, the trustee may choose Optional Method 3 as the trust's method of reporting instead of filing Form 1041.
Once you choose the trust's filing method, you must follow the rules under Changing filing methods if you want to change to another method.
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A common trust fund (as defined in section 584(a)).
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A foreign trust or a trust that has any of its assets located outside the United States.
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A qualified subchapter S trust (as defined in section 1361(d)(3)).
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A trust all of which is treated as owned by one grantor or one other person whose tax year is other than a calendar year.
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A trust all of which is treated as owned by one or more grantors or other persons, one of which is not a U.S. person.
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A trust all of which is treated as owned by one or more grantors or other persons if at least one grantor or other person is an exempt recipient for information reporting purposes, unless at least one grantor or other person is not an exempt recipient and the trustee reports without treating any of the grantors or other persons as exempt recipients.
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Shows all items of income, deduction, and credit of the trust;
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Identifies the payer of each item of income;
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Explains how the grantor or other person treated as owner of the trust takes those items into account when figuring the grantor's or other person's taxable income or tax; and
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Informs the grantor or other person treated as the owner of the trust that those items must be included when figuring taxable income and credits on his or her income tax return.
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Shows all items of income, deduction, and credit of the trust;
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Explains how the grantor or other person treated as owner of the trust takes those items into account when figuring the grantor's or other person's taxable income or tax; and
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Informs the grantor or other person treated as the owner of the trust that those items must be included when figuring taxable income and credits on his or her income tax return. This statement satisfies the requirement to give the recipient copies of the Forms 1099 filed by the trustee.
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Shows all items of income, deduction, and credit of the trust attributable to the part of the trust treated as owned by the grantor or other person;
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Explains how the grantor or other person treated as owner of the trust takes those items into account when figuring the grantor's or other person's taxable income or tax; and
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Informs the grantor or other person treated as the owner of the trust that those items must be included when figuring taxable income and credits on his or her income tax return. This statement satisfies the requirement to give the recipient copies of the Forms 1099 filed by the trustee.
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A trust established after 1995, all of which is owned by two or more grantors (treating spouses filing a joint return as one grantor).
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A trust with 10 or more grantors established after 1983 but before
1996.
If you are filing for a pooled income fund, attach a statement to support the following:
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The calculation of the yearly rate of return,
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The computation of the deduction for distributions to the beneficiaries, and
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The computation of any charitable deduction.
You do not have to complete Schedules A or B of Form 1041.
Also, you must file Form 5227, Split-Interest Trust Information Return, for the pooled income fund. However, if all amounts were transferred in trust before May 27, 1969, or if an amount was transferred to the trust after May 26, 1969, for which no deduction was allowed under any of the sections listed under section 4947(a)(2), then Form 5227 does not have to be filed.
Note:
Form 1041-A is no longer filed by pooled income funds.
Special rules apply when figuring the tax on the S portion of an electing small business trust (ESBT). The S portion of an ESBT is the portion of the trust that consists of stock in one or more S corporations and is not treated as a grantor type trust. The tax on the S portion:
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Must be figured separately from the tax on the remainder of the ESBT (if any) and attached to the return,
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Is entered to the left of the Schedule G, line 7, entry space preceded by “Sec. 641(c),” and
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Is included in the total tax on Schedule G, line 7.
The tax on the remainder (non-S portion) of the ESBT is figured in the normal manner on Form 1041.
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Treat that portion of the ESBT as if it were a separate trust;
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Include only the income, losses, deductions, and credits allocated to the ESBT as an S corporation shareholder and gain or loss from the disposition of S corporation stock;
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Aggregate items of income, losses, deductions, and credits allocated to the ESBT as an S corporation shareholder if the S portion of the ESBT has stock in more than one S corporation;
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Deduct state and local income taxes and administrative expenses directly related to the S portion or allocated to the S portion if the allocation is reasonable in light of all the circumstances;
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Deduct interest expense paid or accrued on indebtedness incurred to acquire stock in an S corporation;
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Do not claim a deduction for capital losses in excess of capital gains;
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Do not claim an income distribution deduction or an exemption amount;
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Do not claim an exemption amount in figuring the alternative minimum tax; and
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Do not use the tax rate schedule to figure the tax. The tax is 35% of the S portion's taxable income except in figuring the maximum tax on qualified dividends and capital gains.
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Complete the entity portion;
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Follow the instructions above for figuring the tax on the S corporation items;
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Carry the tax from line 7 of Schedule G to line 23 on page 1; and
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Complete the rest of the return.
Qualified fiduciaries or transmitters may be able to file Form 1041 and related schedules electronically. If you wish to do this, you must file Form 8633, Application to Participate in the IRS e-file Program. If you file Form 1041 electronically, you may now sign the return electronically by using a personal identification number. See Form 8879-F, IRS e-file Signature Authorization for Form 1041, for details. If you do not sign the electronically filed return by using a PIN, you must file Form 8453-F, U.S. Estate or Trust Income Tax Declaration and Signature for Electronic Filing.
For more details, get Pub. 1437, Procedures for the 1041 e-file Program, and Pub. 1438, File Specifications, Validation Criteria, and Record Layouts for the Form 1041, e-file Program, U.S. Income Tax Return for Estates and Trusts for Tax Year 2007. If Form 1041 is e-filed and there is a balance due, the fiduciary may authorize an electronic funds withdrawal with the return.
For calendar year estates and trusts, file Form 1041 and Schedule(s) K-1 on or before April 15, 2008. For fiscal year estates and trusts, file Form 1041 by the 15th day of the 4th month following the close of the tax year. For example, an estate that has a tax year that ends on April 30, 2008, must file Form 1041 by August 15, 2008. If the due date falls on a Saturday, Sunday, or legal holiday, file on the next business day.
You can use certain private delivery services designated by the IRS to meet the “timely mailing as timely filing/paying” rule for tax returns and payments. These private delivery services include only the following.
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DHL Worldwide Express (DHL): DHL Same Day Service, DHL Next Day 10:30 am, DHL Next Day 12:00 pm, DHL Next Day 3:00 pm, and DHL 2nd Day Service.
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Federal Express (FedEx): FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2Day, FedEx International Priority, and FedEx International First.
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United Parcel Service (UPS): UPS Next Day Air, UPS Next Day Air Saver, UPS 2nd Day Air, UPS 2nd Day Air A.M., UPS Worldwide Express Plus, and UPS Worldwide Express.
The private delivery service can tell you how to get written proof of the mailing date.
File the 2007 return for calendar year 2007 and fiscal years beginning in 2007 and ending in 2008. If the return is for a fiscal year or a short tax year (less than 12 months), fill in the tax year space at the top of the form.
The 2007 Form 1041 may also be used for a tax year beginning in 2008 if:
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The estate or trust has a tax year of less than 12 months that begins and ends in 2008, and
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The 2008 Form 1041 is not available by the time the estate or trust is required to file its tax return. However, the estate or trust must show its 2008 tax year on the 2007 Form 1041 and incorporate any tax law changes that are effective for tax years beginning after December 31, 2007.
The fiduciary, or an authorized representative, must sign Form 1041. If there are joint fiduciaries, only one is required to sign the return.
A financial institution that submitted estimated tax payments for trusts for which it is the trustee must enter its employer identification number (EIN) in the space provided for the EIN of the fiduciary. Do not enter the EIN of the trust. For this purpose, a financial institution is one that maintains a Treasury Tax and Loan account. If you are an attorney or other individual functioning in a fiduciary capacity, leave this space blank. Do not enter your individual social security number (SSN).
If you, as fiduciary, fill in Form 1041, leave the Paid Preparer's space blank. If someone prepares this return and does not charge you, that person should not sign the return.
Generally, anyone who is paid to prepare a tax return must sign the return and fill in the other blanks in the Paid Preparer's Use Only area of the return.
The person required to sign the return must:
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Complete the required preparer information,
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Sign it in the space provided for the preparer's signature (a facsimile signature is acceptable), and
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Give you a copy of the return for your records.
If the fiduciary wants to allow the IRS to discuss the estate's or trust's 2007 tax return with the paid preparer who signed it, check the “Yes” box in the signature area of the return. This authorization applies only to the individual whose signature appears in the “Paid Preparer's Use Only” section of the estate's or trust's return. It does not apply to the firm, if any, shown in that section.
If the “Yes” box is checked, the fiduciary is authorizing the IRS to call the paid preparer to answer any questions that may arise during the processing of the estate's or trust's return. The fiduciary is also authorizing the paid preparer to:
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Give the IRS any information that is missing from the estate's or trust's return,
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Call the IRS for information about the processing of the estate's or trust's return or the status of its refund or payment(s), and
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Respond to certain IRS notices that the fiduciary has shared with the preparer about math errors, offsets, and return preparation. The notices will not be sent to the preparer.