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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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Individual passed away Dec 2010 and I am completing 1041 for

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Individual passed away Dec 2010 and I am completing 1041 for decedent's estate for period Dec 2010 to Nov 2011. Income for period is $20 in interest and $2000.00 distribution from a governmental pension. That is all. Misc deductions are $500.00 & attorney fees for probate, etc are $3,500.00 (so total deductions exceed income). Should deductions be allocated to accounting income or corpus. There are 3 beneficiaries (equal shares) - 2 individuals, one non-profit. I would like to make this the initial and final return. Is this possible? Do I have to allocate the excess deductions to the beneficiaries and do they get a tax benefit out of this?

The above was the only income but the following amounts were also deposited in the estate bank account because they belonged to decedent:
1) $48,000.00 which was in a bank account under the decedent's name & transferred to estate bank account
2) $12,000.00 for a life insurance death benefit

I assume the above two items have no tax implications. The funds will be given to beneficiaries in Nov 2012. No distributions have been made as of yet. Does the $48K and $12K have to be reported somewhere on return even though it is not income? Does the non-profit get mentioned even though only what I assume is corpus will be distributed to it?
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

Hi and welcome to Just Answer!

Should deductions be allocated to accounting income or corpus.

Deductible expenses are attributable to taxable income first and if anything left - these expenses are covered from corpus.

 

There are 3 beneficiaries (equal shares) - 2 individuals, one non-profit. I would like to make this the initial and final return. Is this possible?

Yes - that is possible. You need to have complete distribution of all assets and on the form 1041 - in the header - both boxes should be checked "Initial return" and "Final return"

Correspondingly - on the form K-1 - check the box "Final K-1"

Do I have to allocate the excess deductions to the beneficiaries and do they get a tax benefit out of this?
You may allocate the excess deductions to the beneficiaries - will or will not they be able to use any passed through deductions - depends on their individual circumstances.

Excess deductions for the final year are generally reported by beneficiaries on schedule A, line 23.

 

Let me know if you need any help.

Be sure to ask if any clarification needed.

Customer: replied 1 year ago.

Thank you Lev. How about the the second half of the question?

Expert:  Lev replied 1 year ago.

Sorry I overlooked these items...

 

I assume the above two items have no tax implications.

You are correct.

1.

Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price. This is true even if the proceeds were paid under an accident or health insurance policy or an endowment contract.

2.

As a recipient of inheritance - either the estate or the beneficiary - does not need to claim it as income. Regardless of the value. Please see for reference IRS publication 525 page 33 - http://www.irs.gov/pub/irs-pdf/p525.pdf

graphic

 

Does the $48K and $12K have to be reported somewhere on return even though it is not income?

No need to report these items on the income tax return. But you may mention these amounts in comments on K-1.

Does the non-profit get mentioned even though only what I assume is corpus will be distributed to it?

As - there are neither income nor deduction items - no need to mention on the income tax return.

 

Sorry for confusion.

Let me know if you need any help.

Customer: replied 1 year ago.

Your information helped me immensely. Last thoughts to make sure I understood correctly:


1) Should my comments on the K-1 say beneficiary will receive $20k [($48K bank accounts + 12K life insurance) * .333]?


2) Should I include this distribution from corpus on line 10, sch B, form 1041?


3)Is it okay to mark the return ending 11/30/2011 final even though the corpus has not yet be distributed? Note, that it will be distributed shortly and no income existed after 11/30/2011 and none ever will

Expert:  Lev replied 1 year ago.

1) Should my comments on the K-1 say beneficiary will receive $20k [($48K bank accounts + 12K life insurance) * .333]?

You may but are not required to mention that information on K-1.

Some administrators provide additional letter that is not sent to the IRS with detailed distribution info.

2) Should I include this distribution from corpus on line 10, sch B, form 1041?

Form 1041 is to report items related to income taxes - those related to income and deductions. No need to mention the distribution from corpus on schedule B.


3)Is it okay to mark the return ending 11/30/2011 final even though the corpus has not yet be distributed?

You may do that if you do not expect any following income tax returns for the trust. However that is not a good practice - because you may not use EIN of the trust after 11/30/2011. For instance - all trust's bank accounts should be closed as EIN would not be valid after that date.

As a general practice - the Final tax return is filed after all trust's assets are distributed and the trust is terminated.

 

Let me know if you need any help.

Customer: replied 1 year ago.

Your insights have been fabulous.


 


To wrap this up finally, will it be ok to file the final return (11/30/2012) with zero income? All that's going to be done from now until 11/30/2012 is to liquidate the bank accounts and give 1/3 each to 2 individuals and one charity.

Expert:  Lev replied 1 year ago.

Yes - you may file the income tax return with zero income and mark it as a final tax return - assuming there is no income in reporting period.

Let me know if you need any help.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22656
Experience: Taxes, Immigration, Labor Relations
Lev and 4 other Tax Specialists are ready to help you
Customer: replied 1 year ago.
,I followed your advice and did not mark the initial return as final return even though no more income is expected due to the fact that the corpus has not yet been distributed.To close out the final year which is fast approaching, I have these three issues:1)Is reporting the distribution from corpus on line 10, sch B, form 1041 optional? Above you tell me it is not necessary but from some of the literature I have been reading, it says to do just that. I know there are no tax implications for corpus distributions, but I'd like to do it correctly.2) Would my excess deductions carry over to this final return and reported on the beneficiary's K-1s in addition to the final years' excess deductions?3) With the initial 1041, I made the declaration that I will not be deducting the same expenses on Form 706. Do I have to make the election again this second and final year if that is the case or is that an election you make just in the beginning?
Expert:  Lev replied 1 year ago.
Is reporting the distribution from corpus on line 10, sch B, form 1041 optional?
The distribution of corpus has no practical difference for the estate.
However - there would be the difference in case on the trust (which files the same form) because the distribution of corpus or NOT distribution of income makes the trust Complex and requires a different amount of the Exemption.
The line 10 reads - "Other amounts paid, credited, or otherwise required to be distributed" - so the line 10 does include all amounts, whether income or corpus and whether required or not and just paid.
However in case of the estate reporting or not reporting the distribution of corpus will make no difference.

2) Would my excess deductions carry over to this final return and reported on the beneficiary's K-1s in addition to the final years' excess deductions?
Excess deductions for the reporting year are passed to beneficiaries and are not carried over to following year.
3) With the initial 1041, I made the declaration that I will not be deducting the same expenses on Form 706. Do I have to make the election again this second and final year if that is the case or is that an election you make just in the beginning?
No - you do not need to make the same declaration again.

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