If you had a loved one who died in 2021, you may be faced with the need to file taxes for an estate or a trust.
When a person dies, their assets belong to an estate. Any income generated from assets in that estate is income from the estate. If the estate generates more than $600 in income, the estate is responsible for paying income taxes.
This is what you need to know about taxes for estates and trusts. If you’re simply looking for the best tax software in general, check out our guide to the best tax software here.
Personal Income Tax Return vs. Estate And Trust Income Tax Return vs. The Estate Tax
If you had a parent or spouse who died during the last tax year, you’re likely required to file a tax return for that person. This person’s income that they received during their lifetime should be filed as a part of a regular tax return. You can use any major tax software program to handle the deceased person’s tax return.
In addition to the person’s lifetime income, you may be required to file a return for their estate. Any income earned after the deceased person’s death is attributed to their estate. This could include posthumous rental income, royalties, or even income from business transactions. If an estate earns more than $600, it must file an IRS Form 1041.
Estate and trust income tax returns are different from personal tax returns. When a person earns income posthumously, that income is attributed to an estate rather than an individual. While deceased people don’t earn income from a job, they may earn income from rent, royalties, or even income from business transactions. Any estate that earns more than $600 must file an IRS Form 1041. Usually, a personal representative or an executor will file this form for the deceased person. Trusts, which are arrangements where a trustee manages money on behalf of a beneficiary, are subject to the same IRS filing requirements. Estates and trusts also have to handle the transfer of wealth to individuals. At this point, estate distributions are rarely taxable for the beneficiary. The estate tax (also called a wealth transfer tax) is levied on estates above $11.7 million. Estates that are larger than $11.7 million need to file IRS Form 706. People dealing with an estate this large should consult with a Certified Public Accountant (CPA) for specific advice on how to handle the transfer most efficiently.
Tax Software Considerations For Estate And Trust Income Taxes
Preparing a return for an estate or trust bears some similarities to filing a personal return. However, the tax software must do more than just maximize a refund check. These are a few of the “must-haves” for estates and trusts that want to use software to file their returns.
Generate Accurate K-1 Forms For Beneficiaries
All estate and tax software must generate K-1 forms for each of the beneficiaries. These forms indicate how much beneficiaries must pay in income tax. The K-1 Form doesn’t cover all wealth transfers. It only covers distributions from an estate’s current income. For example, let’s say an estate generates $5,000 in income from a rental property. It pays $500 for advice from a lawyer. It then passes the remaining $4,500 to five beneficiaries. The estate becomes responsible to generate five unique Schedule K-1 forms for each beneficiary.
While the estate is in probate, the estate needs to request an Employer Identification Number (EIN) to file Form 1041 correctly. It’s easy to file for an EIN online. Once you have an EIN for the trust, you can file taxes (Form 1041) for the estate.
Calculating And Paying Income Taxes
It’s equally critical for the tax software to generate Form 1041 for the state. Form 1041 indicates whether an estate or trust owes taxes or is eligible for a tax refund. Like individuals, estates can generate income, and they may be eligible for certain deductions (for example, charitable giving deductions or qualified business income deductions). Tax software should easily handle these types of calculations. It should also help filers e-file IRS form 1041.
What Tax Software Can Be Used To File Taxes For An Estate Or Trust?
It’s common for estates to hire a professional to file the fiduciary taxes for an estate. After all, generating K-1 forms and figuring out the rules for Form 1041 can be complex and time-consuming. However, those in charge of a relatively small estate may decide to file taxes on their own.
Most tax software for filing IRS Form 1041 is designed for tax professionals. These companies have prohibitively expensive price points (where enlisting a CPA would be less expensive). Additionally, most software is confusing for novice users. But for everyday filers, we found two software packages that allow users to file Form 1041 and issue the Schedule K-1 forms.
TaxAct Estates and Trusts is more focused on estate planning situations than TurboTax Business. However, estates that have many business deductions (such as expenses and depreciation from rental properties) may find TurboTax easier to use.
Estate And Trust Taxes FAQs
Let’s answer a few of the most common questions that people ask about how to file taxes for estates and trusts.
My spouse died last year. Do I need to file a return for them?
As a surviving spouse, you’ll have to work together with your deceased spouse’s representative to file a joint income tax return. This return (IRS Form 1040) is filed as if it’s a typical tax return. Surviving spouses may file this return without the spouse’s representative if no representative has been appointed by the court. As a surviving spouse, you’re eligible to claim the full refund if you file a joint return with your deceased spouse.
Does my estate need to file a tax form before distributing the assets of the estate?
It’s unlikely that an estate will have to file a tax form. Estates larger than $11.7 million are subject to an estate tax. The estates must file IRS Form 706. Typically estates this large should enlist the help of a CPA to resolve any issues and to efficiently transfer wealth to the beneficiaries.
I’m responsible for filing a return for an estate. Should I do it myself or enlist a professional?
Tech-savvy people may decide to save a few hundred dollars and use software to file IRS Form 1041. But in many cases, working with a tax pro can ensure that the tax return is done correctly and deductions are maximized.
I received a K-1 from an estate. What should I do?
If you received a K-1 from an estate, you’re responsible for paying tax on the income you received. The income counts as ordinary income, so the tax will be paid at your marginal tax rate. Most major tax programs support income from K-1 forms. We especially like TaxHawk, H&R Block and TaxSlayer for people who need to file for multiple income schedules.
The software listed here is designed to simplify the process of paying income taxes for an estate or trust. However, in complex situations, it may make sense to hand this task over to a professional who can handle all the heavy lifting of accurately filing your estate tax return.