Experienced Attorneys Providing Fiduciary Income Tax Return Services throughout The Islands and Cape Cod
A deceased person’s estate is considered a separate legal entity for federal and income tax purposes. Once a trust becomes irrevocable after the death of one or both the trust makers, the trust is typically required to obtain a separate tax identification number (or ITIN) and must begin filing annual income tax returns.
Executors of wills and administrators of trusts held for a deceased person are considered fiduciaries because they hold money or other assets on behalf of a beneficiary. The Internal Revenue Service requires that these fiduciaries file the appropriate form (form 1041) and pay any income taxes before finalizing the transfer of assets to beneficiaries. This applies to both assets in a trust and assets being transferred through a will.
A federal income tax return is required on all estates that have produced a gross income of $600 or more in a tax year or if a beneficiary is a nonresident alien. Typically, an estate can have many different types of income, such as rent payments from real estate included in the state, interest on an estate bank account, or any salary not paid to the deceased person before death.
Massachusetts also requires a state income tax return by trusts when there is a trustee located in Massachusetts or when there is a Massachusetts source income, such as investment real estate/rental income or business income from properties or entities located within the state of Massachusetts.
What is the Appropriate Time Frame for Filing Taxes?
The estate’s tax year begins on the date when the deceased person died. A fiduciary has up to 12 months to file an estate income tax return, and it can be done anytime during the 12 months. The fiduciary can choose if they want to file taxes based on a calendar year or on a fiscal year. Once that choice is made, it cannot be changed.
For a trust or estate based on a calendar year, tax returns must be filed by April 15th of the year following the date when the decedent passed away. For tax returns based on a fiscal year, the fiduciary must file on or before the 15th day of the fourth month after the end of the fiscal year.
Are There Any Deductions or Exemptions Available?
Yes. All estates get a $600 exemption. There are also other items that can be deducted. You may take an income distribution deduction if you were required to pay out the income on estate assets to beneficiaries.
If the estate paid the executor, the amount paid can be reported as a deduction from the estate’s income. Likewise, you can deduct fees paid to any experts needed in the process, such as estate planning attorneys, accountants, and tax preparers. Expenses incurred in the process of wrapping up an estate are also deductible and may include amounts spent collecting assets, paying debts, and distributing the property to beneficiaries inheriting it.
If the estate must go through formal probate, any money spent to cover probate court filing fees, publish probate notes in the newspaper, and purchase a bond (an insurance policy protecting the estate from an executor’s misuse) is eligible for a deduction. You may also deduct miscellaneous expenses that exceed two percent of the estate’s adjusted gross income, such as investment advice, safe deposit box rentals, office and postage supplies, and travel expenses. Medical or funeral expenses are NOT deductible on form 1041. Medical expenses may be deducted from the deceased person’s individual income tax return.
How Can I Get Help Filing Fiduciary Income Tax Returns?
While an attorney providing fiduciary is not required for you to be able to file a Fiduciary Income Tax return, it is strongly recommended that you do seek the help of a professional with experience and knowledge in this area, so that you can avoid any delays and costly mistakes. Oftentimes, families will look to Boyd & Boyd for advice and assistance preparing this type of tax return because of our experience as a professional trustee. We can assist you with the entire process and make sure your Fiduciary Income Tax return is filled out properly and without any errors or missing information that might result in headaches down the road.
Call us at (508) 775-7800 and request a free initial estate planning consultation to learn more. We are here to help.