IRS Form 1041 (“U.S. Income Tax Return for Estates and Trusts”) is used by a fiduciary of a domestic decedent’s estate, trust, or bankruptcy estate for a number of important reporting reasons. It is utilized to report income, deductions, gains, losses, and related items of an estate or trust; income that is either accumulated or held for future distribution or distributed currently to its beneficiaries; any income tax liability of the estate or trust; and employment taxes on wages paid to household employees. (It is also used to report the Net Investment Income Tax from Form 8960, line 21, on the Tax Computation section under Schedule G).
This article will cover the basics of who is required to file IRS Form 1041 for decedent’s estates and trusts in general; it is not intended to convey tax or legal advice. If you have further questions regarding filing IRS Form 1041, please contact Sherayzen Law Office, Ltd.
Who Must File IRS Form 1041?
In general, the fiduciary (or one of the joint fiduciaries) for a decedent’s domestic estate must file IRS Form 1041 if the estate has gross income for the tax year of $600 or more, or if it has a beneficiary who is a nonresident alien.
An estate is considered to be a “domestic” estate if it is not a foreign estate; a foreign estate is one in which its income is from sources outside the United States that is not effectively connected with the conduct of a U.S. trade or business, and is not includible in gross income. Note that fiduciaries of foreign estates file Form 1040NR, U.S. Nonresident Alien Income Tax Return, rather than IRS Form 1041.
In addition, the fiduciary (or one of the joint fiduciaries) of domestic trusts that are taxable under Internal Revenue Code (“IRC”) Section 641 must file the form if the trust has any taxable income for the tax year, if it has gross income of $600 or more (regardless of whether it has taxable income), or if it has a beneficiary who is a nonresident alien.
A trust is considered to be “domestic” if a U.S. court is able to exercise primary supervision over the administration of the trust (the “court test”), and one or more U.S. persons have the authority to control all substantial decisions of the trust (the “control test”). Additionally, a trust may be treated as a domestic trust (other than a trust treated as wholly owned by the grantor) if it was in existence on August 20, 1996, was treated as a domestic trust on August 19, 1996, and elected to continue to be treated as a domestic trust.
Trusts that are not considered to be domestic trusts will be deemed foreign trusts, and the trustees for such trusts file Form 1040NR instead of IRS Form 1041, and a foreign trust with a U.S. owner may also be required to file Form 3520-A, (“Annual Information Return of Foreign Trust With a U.S. Owner”). Further, if a domestic trust becomes a foreign trust, it will be treated as having transferred all of its assets to a foreign trust, except to the extent that a grantor or another person is treated as being the owner of the trust when the trust becomes a foreign trust (See IRC Section 684 for more information).
Contact Sherayzen Law Office for Help With the IRS Form 1041, Estate and Trust Tax Compliance
Tax compliance for trusts and estates often involves many complex issues, and you are advised to seek the advice of a tax attorney. Eugene Sherayzen, an experienced international tax attorney of Sherayzen Law Office, Ltd. can assist you in all of your tax and legal needs.