Form 1041 – Income Tax Return for Estates

When an individual passes away, his/her will or trust identifies a representative to administer his/her estate. This representative is referred to as the executor (male) or executrix (female) and is generally approved or assigned by the local circuit court. The Internal Revenue Service tasks this representative to file a final personal return and information returns until the estate is completely transferred to the heirs. This article describes the use of the Form 1041 and how the representative does the accounting and prepares the tax return.

For the sake of ease, the article will only use the male pronoun for the deceased individual and the representative.

Whenever someone dies, he has yet to file his final personal tax return. It is the responsibility of the representative to gather the source documents for the Form 1040 and prepare the final return. In some cases, this representative has to file two years of final returns as it is not uncommon for the deceased to have not filed the prior year return. Naturally, the representative has to file not only the personal tax return from the prior year, but the return for the current year. The current year return will be a short year return. Anywhere from 1 calendar day to upwards of 365 days (if the deceased died on the last day of the calendar year) will have to have an accounting in order to file an accurate return.

The representative has to gather the source documents, which can include the following forms:

  • W-2(‘s)
  • Form 1099-Dividends, Interest, Capital Sales, or Sales (Form 1099-D,I, B, &S)
  • Form K-1’s for any business interests
  • Rental property information
  • Information related to stock sales etc.
  • Farming/Personal Business Information (Schedule C)
  • Social Security Information
  • Retirement Information (Form 1099-R)
  • Government payments (Form 1099-G)

Once gathered, the representative has to divide the information between the two distinct accounting periods. The first are those days he was alive and those after he passed. Many banking, mortgage, brokerage, and retirement plan payment institutions do not know that the taxpayer has actually passed. These documents are important to separate the income between the two periods of time. 

Once gathered, the representative should load the data into a spreadsheet and separate the income between the two periods of time. The latter period is the time after death often referred to as the ‘Trust Period’. Here, the information is documented and calculated for the ‘Trust’ period. This means, that after the day of death, all revenues and expenses associated with the deceased are in a trust entity. The representative files for an entity identification number via form SS-4, go to Resources Page and click on the SS-4 Form. Once a number is assigned, the period under ‘Trust’ is accounted for via Form 1041. Notice how the Form follows Form 1040.  Form 1040 is for when you are alive; Form 1041 is for when you are dead. 

Often the deceased is married. This complicates the situation somewhat as most married couples file a combined return. The representative only represents the deceased and does so in the deceased’s best interest. The representative may have to work with the spouse and sometimes may have to file a ‘Married Filing Separate’ tax return in order to protect the wishes and orders of the deceased. It is in the best interest of both the former spouse and the representative to communicate in order to pay the least amount of overall taxes to the government.  

Once the final personal returns are complete, the representative will have to file a partial year Form 1041. It is rare for the deceased to die on the last calendar day of the tax year. 

The Form 1041 is actually an information return. The deceased identifies one or more individuals as the heirs to the estate. The most common beneficiary is the spouse of the deceased. During the period of time where the estate is monitored by the court (often through a ‘Commissioner of Accounts’), the estate earns money via dividends, interest, and business income both passive and active. This income has to be reported to the IRS, in addition the corresponding deductions are accounted for in the estate and they too are reported to the IRS. The final amount of income is the net income that is reported to the IRS on behalf of the beneficiaries. The beneficiaries are those one to many individuals that will receive the assets of the deceased. While these individuals wait for transfer of the assets to their possession, these assets earn money. This income is pass-through to the beneficiaries and reported to them and the IRS via Form 1041 K-1. The K-1 is a reporting document similar to a W-2 or a Form 1099 identifying all income and the form of that income, corresponding deductions and credits to the beneficiary.

The Internal Revenue Service provides guidance on particulars via Publication 559, Survivors, Executors, and Administrators in how to report income and deductions.

Funeral and final medical expenses are not deductible in Form 1041. Medical expenses are a function of the deceased life and therefore deductible on the deceased’s final Form 1040 if allowed. The funeral expenses are a function of the deceased’s taxable estate and are included in the estate tax return, Form 706. See my article in the legal section and special taxation section as it relates to Form 706, the Estate Tax Return

It is important for the representative to understand that there are 3 distinct forms of tax returns required upon the death of the taxpayer.  Each is identified and described below:

Final Form 1040 – this is the final tax return of the taxpayer during the days he was alive.
Form 706 – This is the estate tax return, which identifies the entire wealth of the taxpayer at the moment of death. It basically identifies all assets and liabilities at that exact moment of death.
Form 1041 – from the moment he dies until the estate is completely distributed to the heirs, the assets earn money. These earnings are reported via the Form 1041 and assigned to the beneficiaries as if they had earned the money (Form 1041 K-1).

The Form 1041 is limited to the income earned and transactions that occur from the moment of death of the taxpayer until all assets are distributed to the heirs. The representative must be assigned and/or approved by the Circuit Court and this representative is responsible to ensure full compliance with not only the local law and state law, but the reporting requirements of the IRS. It is a duty not to be taken lightly. By understanding the above information as to the timing and the types of reports required, the representative can file the proper returns in a timely manner. The Form 1041 is used for Estate Tax Reporting and is also a tool used to report trust information (a future article). This article provided a basic understanding of the terms and timing of the respective reports. Act on Knowledge.

Value Investing

Do you want to learn how to get returns like this?

Then learn about Value Investing. Value investing in the simplest of terms means to buy low and sell high. Value investing is defined as a systematic process of buying high quality stock at an undervalued market price quantified by intrinsic value and justified via financial analysis; then selling the stock in a timely manner upon market price recovery.

There are four key principles used with value investing. Each is required. They are:

  1. Risk Reduction – Buy only high quality stocks;
  2. Intrinsic Value – The underlying assets and operations are of good quality and performance;
  3. Financial Analysis – Use core financial information, business ratios and key performance indicators to create a high level of confidence that recovery is just a matter of time;
  4. Patience – Allow time to work for the investor.

If you are interested in learning more, go to the Membership Program page under Value Investing section in the header above. 

Join the value investing club and learn about value investing and how you can easily acquire similar results with your investment fund. Upon joining, you’ll receive the book Value Investing with Business Ratios, a reference guide used with all the decision models you build. Each member goes through three distinct phases:

  1. Education – Introduction to value investing along with terminology used are explained. Key principles of value investing are covered via a series of lessons and tutorials.
  2. Development – Members are taught how pools of investments are developed by first learning about financial metrics and how to read financial statements. The member then uses existing models to grasp the core understanding of developing buy/sell triggers for high quality stocks.
  3. Sophistication – Most members reach this phase of understanding after about six months. Many members create their own pools of investments and share with others their knowledge. Members are introduced to more sophisticated types of investments and how to use them to reduce risk and improve, via leverage, overall returns for their value investment pools.

Each week, you receive an e-mail with a full update on the pools. Follow along as the Investment Fund grows. Start investing with confidence from what you learn. Create your own fund and over time, accumulate wealth. Joining entitles you to the following:

  • Lessons about value investing and the principles involved;
  • Free webinars from the author following up the lessons;
  • Charts, graphs, tutorials, templates and resources to use when you create your own pool;
  • Access to existing pools and their respective data models along with buy/sell triggers;
  • Follow along with the investment fund and its weekly updates;
  • White papers addressing financial principles and proper interpretation methods; AND
  • Some simple good advice.

Value Investment Club

Please Signup
Username can not be left blank.
Please enter valid data.
This username is already registered, please choose another one.
This username is invalid. Please enter a valid username.
First Name
First Name can not be left blank.
Please enter valid data.
This first name is invalid. Please enter a valid first name.
Last Name
Last Name can not be left blank.
Please enter valid data.
This last name is invalid. Please enter a valid last name.
Website (URL)
Website (URL) can not be left blank.
Invalid URL
Invalid URL
Email Address
Email Address can not be left blank.
Please enter valid email address.
Please enter valid email address.
This email is already registered, please choose another one.
Password can not be left blank.
Please enter valid data.
Please enter at least 6 characters.
    Strength: Very Weak
    Select Your Payment Gateway
    How you want to pay?
    Payment Summary

    Your currently selected plan : , Plan Amount :
    , Final Payable Amount: