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Arthur Rubin
Arthur Rubin, Tax Preparer
Category: Tax
Satisfied Customers: 1270
Experience:  22 years of tax preparation experience, including individual, trust, and estate returns.
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can you deduct all of the attorneys fees on form 1041 even

Resolved Question:

can you deduct all of the attorneys fees on form 1041 even if it is substantially more than the amount of income you are claiming. Do you have to claim all of the saving accounts and personal checking accounts the deceased has on a 1041
Submitted: 3 years ago.
Category: Tax
Expert:  Arthur Rubin replied 3 years ago.

Arthur Rubin :

  1. can you deduct all of the attorneys fees on form 1041 even if it is substantially more than the amount of income you are claiming. Yes. It may not help, as it doesn't seem to flow forward to the beneficiaries, but you can probably claim a NOL loss.

Arthur Rubin :

2. Do you have to claim all of the saving accounts and personal checking accounts the deceased has on a 1041. You claim the interest on those accounts as income, for as long as they are in the estate. Once distributed, the beneficiary needs to worry about them.

Customer :

Do you need to claim a death benefit recieved from a auto policy

Arthur Rubin :

Life insurance benefits are not "income", although any interest on them is income.

Customer :

So do the beneficiaries have to pay tax on the distributions or can the estate pay

Customer :

When figuring out the distributions for the beneficiaries, I must just need to take the remaining balance of cash and break it up equally

Customer :

and is that the amount i need to report on the 1041

Customer :

on line 18

Arthur Rubin :

Normally, distributions are taken first from income, and then from the corpus (body).

Customer :

please explain what corpus body is exactly

Customer :

I am also assuming I will need to send each beneficiary a K1

Customer :

The majority of the income from the estate is non-taxable and does not need to be reported anywhere? is that right

Arthur Rubin :

Exactly what is in the corpus depends on state law, but it refers to the "body" of the estate. "Income" is used to calculated the DNI (Distributable Net Income), which is the maximum which can be passed along to the beneficiaries as income.

Arthur Rubin :

Anything which was an asset in the hands of the decedent is "corpus"; anything which would have been income (taxable) in the hands of the decedent is also income in the hands of the estate.

Arthur Rubin :

(Quick summary; however, capital gains are normally corpus.)

Customer :

the only capital gain to speak of would be from her home but i do not know how much she paid originally so how can i figure a net for capital gains. is there anything else that could be capital gains

Arthur Rubin :

You need to send each beneficiary, who receives a distribution, who does not only have a specific bequest, a K1. Specific bequests (a house, or $10,000) is not taxable to the beneficiary, or reportable on the 1041 as "distributions", if payable from the corpus.

Arthur Rubin :

Unless she died in 2010 and you elect not to have the estate subject to estate tax, all assets in the estate are revalued to their value at death, for the purpose of capital gains.

Arthur Rubin :

What assets does she have?

Customer :

The majority of the income from the estate was from a settle ment with a insurance company for a loss of life from personal injury and pain and suffering i understand it is not taxable income and does not need to be reported

Customer :

The only tangable asset was her home, otherwise all she had was cash and life insurance

Customer :

All of her retirement and pension went to our parents and they paid all of the taxes

Arthur Rubin :

Interest paid on the life insurance, while they decide whether or not to pay, belongs to the estate, or the beneficiaries, depending on timing.

Customer :

The total interest paid on everything has been only 6000.00 dollars, recently we were awarded a large settle ment of 1million dollars for pain and suffering the lawyer fees were 420.500.00 of it

Customer :

can i claim all of the fees even if the estate doesn't report the income

Arthur Rubin :

I'd have to research that further, but I recall "pain and suffering" as taxable. Could you go into more detail as to the basis of the settlement?

Customer :

My sister was killed by a drunk driver, The party who killed her had no insrance or anything. however he was on the time clock and his employer bought and paid for all of his drinks, so the employers insurance company was being sued by my family and chose to settle out of court for 1 million dollars that was recieved for personal injury

Customer :

we only saw 525k of that due to lawyer fees

Customer :

when i asked my corporate accountant he indicated as well as the lawyers none of this money would be taxable, so being that I should not have to claim it right

Arthur Rubin :

If you were my client, I would take more time to research this. One of my sources reports that payments due to physical injury are excludible. In any case, if the $1 million is non-taxable, then the legal fees are non-deductible.

Customer :

can i report enough legal fees so that the estate does not have to pay any taxes

Customer :

we also made a large charitable donation to her college in her name for a lifetime scholarship can i still deduct

Arthur Rubin :

The legal fees related to that court case are not deductible unless there is taxable income. If the estate has other legal fees, such as consulting a lawyer to ensure your distributions are proper, that would be deductible.

Arthur Rubin :

Who made the charitable contribution?

Customer :

The estate

Customer :

So in summary the only reportable income needs to be the Thrift savings plan and her interst income recieved from life insuarance and savings

Arthur Rubin :

If authorized by the will, and the college is a non-profit (not all are), then the scholarship is an allowable charitable deduction of the estate.

Customer :

yes and yes

Arthur Rubin :

I think you're right about the reportable income, except that capital gain on the house (if sold, rather than distributed to the beneficiaries), is also taxable to the estate.

Customer :

The thrift savings plan indicated that a 10 percent tax needs to be paid, so do i put the ten percent down or the whole 99000.00

Customer :

ok how can i figure out the capital gain from the home

Customer :

and on that we sold the home for 188.000.00 dollars but only collected 93000. after paying remaing mortgage

Arthur Rubin :

I think I need more information about the "thrift savings plan". If the are charging a 10% penalty, it sounds as if it might be an annuity. But let's get back to the house.

Customer :

ok

Arthur Rubin :

The "basis" of the house is the FMV (Fair Market Value) at death, plus the cost of any improvements after death.

Customer :

ok that is 188.000.00 no improvements were made

Customer :

so is the 188.000.00 what i use or the 93000.

Arthur Rubin :

The "sale price" is the actual sale price, less commission. (Approximately what you get from the sale, except that most fees are not deductible, and there will be an adjustment for property taxes, reported on the HUD-1 statement.)

Arthur Rubin :

The difference is a long-term capital gain (or loss).

Arthur Rubin :

Where did 93000 come from?

Customer :

so the 93000. is long term capital gain

Customer :

the 1099-s says gross proceeds were 188000.00

Customer :

property tax was 1600 and commisions were 8700.00

Arthur Rubin :

What was the fair market value of the property at death?

Customer :

188.000.00

Customer :

her mortgage was 79000.00

Arthur Rubin :

I thought you said that was the sale price.

Customer :

that is what the appraisal cam in at

Customer :

and that is what it sold for

Arthur Rubin :

It's not unreasonable, then. So you have a long-term capital loss of $8700 (the commission)

Arthur Rubin :

Any mortgage interest and property tax paid by the estate is also deductible.

Customer :

ok

Customer :

so back to the thrift savings paln

Arthur Rubin :

OK. Do they (the thrift savings plan) know she's dead?

Customer :

it indicates if i were to roll it over into a "inherited IRA" i could defer paying tax

Customer :

yes the distribution of 99000. was recieved

Customer :

so i need to claim the whole 99000. for other income

Arthur Rubin :

In that case, the 99000 is taxable income if distributed and not "rolled over". If you're unlucky, the $9900 will be credited as withholding in her account, and you won't be able to get it back before filing her final tax return.

Arthur Rubin :

I think I need to know her date of death.

Customer :

expain witholdin in her account

Customer :

4-19-2007

Arthur Rubin :

If the plan knows she's dead, you should be able to get a waiver of the 10% tax withholding. It would be a code 4 on the 1099-MISC.

Arthur Rubin :

When did you (the estate) get the $99,000?

Customer :

December of 2007

Customer :

how would i get a waiver

Customer :

i did not recieve a 1099-misc form

Customer :

just a letter and a check

Arthur Rubin :

I'm afraid it was taxable to the estate in 2007.

Customer :

ok

Arthur Rubin :

An estate needs to file and pay annual income tax returns, just like an individual.

Arthur Rubin :

Did the letter report an amount withheld, or was 99000 the entire amount?

Customer :

no amount withheld

Arthur Rubin :

OK, there's nothing requiring a waiver, then.

Arthur Rubin :

I think I need more information on the timing....

Customer :

ok

Customer :

like what

Arthur Rubin :

When was the house sold? and when did the settlement come in?

Customer :

2007

Customer :

novemeb

Customer :

and the settlement came in in December 2010

Customer :

I did not realize i needed to file a return each year so this is the first return

Customer :

I also did not think since the majority of the income recieved was no taxable i needed t worry to much about it

Customer :

i am sure that i will have a penalty

Arthur Rubin :

Was there any distribution to the beneficiaries in 2007?

Customer :

but I dont think the reportable income will be very much for previous years

Customer :

no

Customer :

there has been no distributons

Customer :

So far the house was a loss and the interest was 5500.00 but now the thrift savings plan is taxable possible

Customer :

the prior attorney fees were almost 10000.

Arthur Rubin :

When was the charitable contribution made?

Customer :

2011

Customer :

She did have a wadell and reed investment that when i recieved it in 2007 she had a loss on that So i claimed that on her personal incoem taxes

Customer :

Do i need to include that as other income

Customer :

can i claim the contribution on this tax return since i hope to make distributions and close the estate

Arthur Rubin :

(Waiting for you to finish typing; I think I've got a summary of what you need to file)

Customer :

ok

Customer :

i think im done

Arthur Rubin :

I don't think the Wadell & Reed investment should have been on her 2007 return, but on the estate's, with the capital/gain loss being the difference between the value of the investment at death and when distributed.

Customer :

ok should i correctnthat

Customer :

and is the value the loss or the amount recieved'

Arthur Rubin :

On the 2007 estate income tax return, you show 99000 in other income, interest on savings (after death), and the sale of the house and the Wadell & Reed investment(s).

Arthur Rubin :

All capital gain/loss are long-term, as the assets were inherited. You place "inherited" in the "date purchased" field on the 1041 Schedule D.

Arthur Rubin :

Capital losses can only reduce taxable income by $3,000; any excess is carried over to the next year.

Customer :

so i cant put a 8700.00 loss it needs to be 3000

Customer :

on the 1041

Customer :

So do i need to go back and file a 1041 return for each year

Arthur Rubin :

Yes. The 1041 Schedule D shows a loss of 8700, but it's limited to a loss of $3000 on line 4.

Customer :

ok

Arthur Rubin :

Yes, I'm going to get to the later years, now.

Arthur Rubin :

For 2008-2010 you have only the estate's savings account interest and the capital loss carryover. Although you report a loss of $3000 on the 1041, copied from the larger negative amount on the schedule D, if the otherwise-taxable income is less than $3000, the carryover is only reduced by that lesser amount.

Customer :

ok one quick question on the sale of her home is that the selling amount or the 3000. capital loss

Arthur Rubin :

Ignoring the Wadell & Reed capital gain/loss, the 2007 1041 Schedule D shows a loss of 8700 and a carryover of 5700.

Customer :

ok but i do not have to put the 188000. recieved in the other income amount only the 99000.00 thrift savings and not the 20000.00 investment but the loss on it and the loss on the house of 3000.00

Arthur Rubin :

Finally, for 2011, you take the charitable contribution deduction (which doesn't help you, much, as I'll explain below), any interest on the estate's savings accounts, and anything left of the capital loss carryover. Any remaining capital loss carryover is distributed to the beneficiaries on form K-1.

Arthur Rubin :

Yes, I think you've got it.

Customer :

ok finally are the k1 distributions going to be reportable income to the family since the money recieved was non taxable in the beginning

Customer :

do i need to go to irs to get a 1041 for 2007-2009

Arthur Rubin :

The problem with the charitable contribution is that you can only take that part attributable to taxable income; as the $525000 is non-taxable, and only the estate's savings account interest are taxable. Capital gain/loss is ignored in calculating the ratio.

Arthur Rubin :

The K-1s add or subtract from the beneficiaries' 2011 returns.

Customer :

that kinda sucks

Arthur Rubin :

You haven't distributed the money yet, have you?

Customer :

no

Customer :

why

Arthur Rubin :

In general, the tax consequences of estate and trust distributions apply to the year the money is distributed.

Customer :

ok

Arthur Rubin :

About how much did the estate earn in interest in 2010?

Customer :

so if it is in 2010 is it taxable

Customer :

365 dollar

Customer :

dollars

Customer :

as i said the whole esate so far has only recieved 5500.00

Customer :

in interst

Customer :

since 2007

Customer :

so is that the only amount taxable

Customer :

5500.00

Customer :

or the 70000.00 dollars each

Arthur Rubin :

There's no point in taking the 661(b) election, then. If you were to do that, distributions made by March 5, 2011 could be attributed to 2010. Unfortunately, that would distribute the $365 in income to the beneficiaries in 2010, increasing the long-term capital loss usable by the estate and distributed to the beneficiries in 2011 by the same $365. Doesn't seem productive.

Arthur Rubin :

You should be able to pick up old 1041 forms and instructions, and 1041 Schedule D forms and instructions, from the IRS web site, if you have a PDF reader.

Customer :

and once i make those distributions is that the amount i put on the line 18 for k-1 at 525000. or just the interest and losses

Arthur Rubin :

The forms can be obtained from http://www.irs.gov/app/picklist/list/priorFormPublication.html

Arthur Rubin :

No, the taxable amounts on the 2011 form 1041 schedule K-1 are limited to the DNI (Distributable Net Income), which, in this case, is the amount of interest in the estate's savings accounts in 2011. The remaining capital loss carryover is reported on box 11 code C of that form.

Customer :

and i only need to put the k-1 information on the final 1041

Arthur Rubin :

Yes. There's no distribution in prior years, so no tax attributes go to the beneficiaries.

Customer :

ok

Customer :

finally so i can go ahead and make the final checks out now for the remaining balance in the account equally and prepare the k1s

Customer :

and finish the esate

Customer :

if i put fiduciary fees in for my services are they taxable to me

Customer :

and i cannot claim the contribution right

Customer :

can you expalin the 2%floor

Customer :

for other deductions allowable

Arthur Rubin :

In general, a fee paid because it's an estate are deductible without regard the 2% floor, but other deductions are subject to the 2% floor.

Arthur Rubin :

Yes, if the estate pays you fiduciary fees then you report them as miscellaneous income (unless you're in the business of managing estates). If you're only taking payment in 2011, then your fees, if in excess of the estate's income, can also be passed on to the beneficiaries as itemized deductions (box 11, code A)

Customer :

ok

Customer :

thank you you have been a great help

Arthur Rubin :

My software seems confused as to whether the allowable capital loss is included in calculating the AGI of which the 2% is taken. You could probably justify it either way.

Arthur Rubin :

I think I'm going to have to drop out of chat, even if you're not completely satisfied. My browser is taking a good 25 seconds to redisplay the chat every minute or so. If you're satisfied with my answers, please press the green ACCEPT button.

Arthur Rubin, Tax Preparer
Category: Tax
Satisfied Customers: 1270
Experience: 22 years of tax preparation experience, including individual, trust, and estate returns.
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