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Fiscal Year vs Calendar Year: What’s Best For You?

Fiscal Year vs Calendar Year: What’s Best for You? by Vincent Russo

The fiduciary of an estate may use either the calendar year or the fiscal year as the “taxable year.”

Typically, most fiduciaries elect to use a fiscal year because it gives them more time. A calendar year ends December 31st, whereas the fiscal year begins on the day of the individual’s death and ends on the last day of the month prior to the one year death anniversary. For example, if the decedent died on any day in March of 2015, his or her estate’s fiscal year would end February 28th, 2016.

Any assets acquired by the estate during the fiscal year are required to be reported on a fiduciary income tax return. The personal representative should also make any estate distributions during that time period.

Hypothetical case study: Tom passed away on June 15, 2015. Tom’s rental properties, savings account, and stock are going to generate revenue for the estate. The personal representative of his estate will file a fiduciary income tax return at the end of his estate’s fiscal year, which is May 31, 2016.

If Tom had beneficiaries of his estate, and distributions were made to them during that fiscal year, the income that would normally be taxable to the estate gets transferred to the beneficiaries instead. Likewise, certain other expenses which occur during that time frame can be subtracted from the estate income.

Actual cash amounts should be claimed on a fiduciary income tax return, not accrued funds. If a stock dividend is recorded on December 31, 2014, and the issuance date was January 3, that dividend would not be taxable in the year 2014; it would be taxable in 2015.

It is important that the personal representative have a firm understanding of whether it makes sense to settle an estate in a custom fiscal year or the standard calendar year. Before that election is made, the personal representative should talk to an accountant or attorney about the different tax ramifications; if the personal representative is able to wait several months to pay an expense in order to offset income that is projected for the following year, then it makes sense to do so.

Note: Fiscal year elections are only available to estates. Trusts are generally required to be filed in according to the calendar year.

Eric J. Einhart

Eric J. Einhart
Vincent J. Russo & Associates, P.C.
1600 Stewart Avenue, Suite 300
Westbury, NY 11590
800-680-1717

This Post Has 4 Comments

  1. Good morning – I know this article has been up for quite a while but I am wondering how the fiduciary make the fiscal year election? The IRS (when it assigned an Employer Identification number) indicated a Form 1041 would be due on April 15th, 2020 – i.e. a calendar year end. This is the first year for the estate with a decedent’s date of death in May 2019. Is simply filing a return indicating a fiscal year end of April 30, 2020 sufficient or is there an actual election form for the first tax filing? Thank you in advance for any response.

    1. Please accept our condolences for your loss.
      Thank you for your interest in our firm’s blog and for your inquiry.
      If you indicate the estate is running on a fiscal year on the initial return (in this case fiscal year would be the date of death to April 30, 2020) is sufficient to elect a fiscal year for the estate.

  2. Another question — if someone dies in 2019 with a 401K which is distributed to the estate in 2019 and passed on out to the beneficiaries in 2019, but the estate files a fiscal year return ending in 2020, do the beneficiaries pick up the income from the K-1 on their 2019 or 2020 income tax returns?

    1. Generally, when an estate runs on a fiscal year the K-1 will report the income in the year the return is filed. So I’m this case the distributable net income (the DNI) would be reported in 2020 and the K-1 stating the DNI would be issued to the Residuary beneficiaries in 2020 to be reported on their individual income tax in the 2020 tax year.
      If you’d like to discuss this in further detail, we’d be happy to arrange a call with one of our Estate Planning Attorneys.

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