Have a Tax Question? Ask a Tax Expert
Hi and welcome to Just Answer!if you received compensation for services you provided for the estate - such compensation is generally treated as self-employment income. However if that is a compensation for being an executor of the estate - that is not your self-employment income - but still included into your income for income tax purposes.You may receive ADDITIONAL compensation to cover your tax liability - but in this case - the total amount is included into your taxable income.Please consider following example. Assuming your compensation is $1000 and you are in 25% tax bracket. If you are compensated $1250 instead - that amount will be included into your taxable income. If you want your net compensation to be $1000 - the gross payment should be $1333 - so your tax liability would be $1333*25%=$333 and net - $1000.
You may also negotiate - if possible - that the compensation to be spread over several years - so you might avoid higher tax brackets.
All personal representatives must include fees paid to them from an estate in their gross income. If you are not in the trade or business of being an executor (for instance, you are the executor of a friend's or relative's estate), report these fees on your Form 1040, line 21. If you are in the trade or business of being an executor, report fees received from the estate as self-employment income on Schedule C or Schedule C-EZ of your Form 1040.
If the estate operates a trade or business and you, as executor, actively participate in the trade or business while fulfilling your duties, any fees you receive related to the operation of the trade or business must be reported as self-employment income on Schedule C (or Schedule C-EZ) of your Form 1040.
Let me know if any clarification needed.
I am understanding some of what you are saying, let me be more specific. The accountant said that I lost $2100.00 in taxes from claiming the commission vs. having not had the commission to claim. She said that as executor I can take that $2100.00 from the estate to make up the difference, and then claim the $2100.oo next year so that it wouldn't put me into a higher tax bracket like this year. This is what she is recommending. The lawyer says ,"No."
You are correct - that additional income resulted in additional tax liability. But generally that is not called a "loss." If you received compensation in 2012 - that compensation - the full amount - is reported on your 2012 tax return.It is possible that the estate pays you more top cover the tax liability - as in your case - that woudl be additional $2100 - but that amount is also your compensation and must be reported on your tax return. If that amount $2100 - is paid in 2013 - it will be included into your taxable income on your 2013 tax return.
Yes, that is what the accountant said, the $2100.00 has to be reported in 2014 as 2013 income. The question is, as the executor, is it legal for me to recover the additional tax liability ($2100.00) from the estate?
There is nothing illegal. You may receive additional compensation. But that additional compensation will be your taxable income as well.