Does taxable income and tax liability have to be = 0 for a Final 1041 for an Estate?

[hmosbergea]

My first 1041 return prep:

Final 1041 for Estate:

Do all income and expenses have to be distributed to beneficiary such that taxable income and tax liability to the estate = 0?

If so, does that mean that expenses like taxes and accounting fees will be lost to beneficiary after distribution if not able to itemize?

Thanks.

[sjrcpa · Accepted solution]

Yes and Yes

[hmosbergea]

Thank you.

[sjrcpa]

You're welcome.

[Gregory Gandrud]

No, the estate can have taxable income in the final year and can pay any tax liability owed. The estate can use the deductions itself in calculating taxable income.

[hmosbergea]

Mr. Gandrud, you and sjrcpa disagree. So, the only entry on K-1 would be to get a refund of the over payment from last year Line 13A?

[hmosbergea]

This morning, a post disagreed with you from a Mr.Gandrud. This is my first 1041 final return. After completing the return without a K-1 (taxpayer request), I discovered there was no provision for getting a refund from last year's over payment. So, after many searches it seemed like the proper approach would be to pass on the income to the taxpayer which you confirmed.

Still confused!

[sjrcpa]

Everything - income, deductions, losses, credits- passes out to the beneficiaries on a final 1041.

[hmosbergea]

Thanks again. This makes total sense. Mr. Gandrup says not necessary.

[sjrcpa]

You're signing the return. You should do the research and not rely on strangers on the internet.

[BobKamman]

Why are you calling it a final return when the fiduciary has held on to funds to pay taxes and other expenses?  Translucent questions likely lead to opaque answers.  

[Gregory Gandrud]

The reply from sjrcpa is incorrect. For example, tax on long-term capital gains must be paid at the trust level and not at the beneficiary level even in the final year. There are however, many scenarios where there can be deductions on Schedule K-1 for beneficiaries in the final year.

[Gregory Gandrud]

Bob, a Final return is one where there is no anticipation of having to file a return in the future (usually because income is expected to not exceed the filing threshold). There is no requirement that there be no assets. A smart fiduciary will move cash into accounts that bear no interest so that he can file a Final return and then pay any remaining taxes and then distribute cash to beneficiaries.

[BobKamman]

I know that’s what many pros do, with intentional disregard to the IRS 1041 instructions:

“Final Return
Check this box if this is a final return
because the estate or trust has
terminated. Also, check the ‘Final K-1'
box at the top of Schedule K-1.”

But do you have some source for the practice? And I don’t believe it is mandatory in a case like this, where the fiduciary does not want K-1s to be issued. If the income was capital gains, it’s quite possible that they would not flow through without the “final” designation.

For a probate estate, the question is often when the court case can be closed even if a residual amount is held for contingent claims. That’s determined under local rules and practice.

[hmosbergea]

Estate was in contention for 9 years. No probate. Court closed estate 11-21. Only income was a working interest royalty. Taxpayer had overpaid tax on 2020 Form 1041 return. There would be a refund after 2021 estate tax calculation due to 2020 over payment.

[BobKamman]

Just assuming someone sold them a living trust because it would allow them to avoid probate.  Doesn't really matter, of course, just another for my collection of anecdotes in the forthcoming book, "How To Avoid Living Trusts."  Is there a state tax refund anticipated?  Were those taxes deducted on a prior return?  So wouldn't they have to be reported as income when finally received?  

[sjrcpa]

" If the income was capital gains, it’s quite possible that they would not flow through without the “final” designation."

I agree.

OP started out by saying final return.

As you noted, the facts make a difference in the answer.

[sjrcpa]

"Court closed estate 11-21"

And when was the royalty interest distributed to the heirs?

And what about all the cash collected from the royalty interest through the years?

Etc.

[auntiewild701]

my client received a final k-1 from his mother's estate.  Box 5 and box 14H cancel each other out.  Do i need to enter the form?  I use Proseries Basic.

[sjrcpa]

Yes. 

[auntiewild701]

How does it work in Basic?  These are the only two numerical entries on the form.

[auntiewild701]

I entered the income from Line 5 and the amount in Box 14H as a negative number.  They shoud cancel each other out, but the prgram in telling me that the amount in Box 5 is taxable income.  Help!

[sjrcpa]

Did you look at Code 14H and see what it is and where it gets reported?

The software is correct.