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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22696
Experience:  Taxes, Immigration, Labor Relations
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When is it necessary to file income tax returns on a trust.

Resolved Question:

When is it necessary to file income tax returns on a trust. What information is required for filing those returns?
Submitted: 2 years ago.
Category: Tax
Expert:  Lev replied 2 years ago.

LEV :

Hi and welcome to Just Answer!
According to instructions - www.irs.gov/pub/irs-pdf/i1041.pdf


The fiduciary (or one of the joint fiduciaries) must file Form 1041 for a domestic trust taxable under section 641 that has:


1. Any taxable income for the tax year,


2. Gross income of $600 or more (regardless of taxable income), or


3. A beneficiary who is a nonresident alien.

LEV :

To prepare the tax return for the trust - we should have all information about trust's income and deductible expenses.
Also - we need to know all distributions to beneficiaries (if any).

Customer:

My mother passed away the end of 2008. She had a home, 2 acres of seperate property and a couple of bank accounts totalling less than 200k and a home equity loan of approx 40k.


 


My sister and I are co-executors. We split the funds in the bank accounts as well as used the funds to make repairs to the home and make payments on utilities and the loan. Sold the home in 2010 at a loss and at that time paid off the loan.

Customer:

Also - We did not make any income from the home, or properties...

Customer:

So with that - would we be required to file a tax return for the trust?

LEV :

When you sold the house - I assume the gross income was more than $600 - so you had to file the income tax return for the trust in 2010.
If you had bank accounts about 200k - I guess these money earned some interest - which is taxable income - and because of that - the trust's income tax return is needed for each year the interest was credited.
When you distribute all assets to beneficiaries - you would need to file the Final tax return for the trust.

Customer:

So - if we distributed funds from the bank accounts over time - for example - closed one bank account in 2008 and split the funds, and did the same in 2009, we should have filed seperate returns for each year?

Customer:

Also - we each received seperate 1099's for the distribution of funds for the sale of the house which we file with our personal tax returns... I think we have made a mess of things?

LEV :

As long as three filing requirements are not met - you are not required to file the income tax return for the trust.

LEV :

Filing requirements are determined separately for each year.

Customer:

Ok - so the only taxable income would have been interest on the bank accounts - what is the minimum you can earn before you are required to file. The sale of the house was for $630k but was appraised at the time of her death to be $730k - so no profit was made. #3 does not apply. So I would assume that we would not be required to file?

LEV :

What is the minimum you can earn before you are required to file?
Any taxable income for the tax year received by the trust - will require filing the income tax return.
The sale of the house was for $630k but was appraised at the time of her death to be $730k - so no profit was made. #3 does not apply. So I would assume that we would not be required to file?
Gross income of $600 or more (regardless of taxable income) received by the trust - will require to file the income tax return.
Because your gross income was $630k - and that is more than $600 - the trust - was required to file the income tax return.

Customer:

So - it looks like I will get my sister to work gathering the information to take to her accountant. Thank you for the information.

LEV :

Please be aware that - having the tax liability and being required to file - these are different issues.
Also - losses from the sale of the house might be passed to beneficiaries and deducted on their tax returns.

Customer:

One more questions - the house was transferred from the trust to me and my sister in 2009. when the house was sold it was in our names, and not in the trust. how would we handle that?

LEV :

That means - you and your sister should report the sale of the house on your tax returns.
If the trust did not sell the house - there is nothing to report on the trust's tax return.

Customer:

Ok - and that is what we did. I received a 1099 for what I received from the sale and reported it on my taxes. Thank you again for your help. It is all clear now.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22696
Experience: Taxes, Immigration, Labor Relations
Lev and 3 other Tax Specialists are ready to help you

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