The IRS recently issued Revenue Procedure 2018-57 providing a glimpse at the tax brackets and rates to be used for 2019 tax returns (which would generally be filed in April 2020), including the tax rate tables for trusts and estates.

The 2018 and 2019 tax brackets for are compared below:

While the new rates won’t be applicable until 2019, the issuance of this Revenue Procedure is a perfect opportunity to discuss a common question we receive: What is a fiduciary income tax return (Form 1041) and who must file?

Form 1041 is a federal income tax form used for both trusts and estates. This form is similar to the one you may file with respect to the income you earned during the past year, however trusts and estates are subject to a different set of rules than we are.

In general, the fiduciary of a US decedent’s estate (e.g. the executor) or trust (e.g., the trustee) files the Form 1041 in order to report the income, deductions, gains, losses, etc. of the estate or trust, to provide whether income is either held for future distributions or distributed currently to beneficiaries, and, ultimately, calculate any income tax liability that may be owed.

Trusts and estates are entitled to a $600 exemption and therefore fiduciaries will generally only file a Form 1041 if the annual gross income exceeds $600. Fiduciaries may also take certain deductions to further reduce income. For instance, a trust or estate can take deductions for any amounts transferred to beneficiaries, and an executor may deduct their fee and administrative costs incurred in settling the estate.

If after taking all possible deductions, the trust or estate still owes tax, the fiduciary will be required to file a Form 1041. An estate or trust may use any date for its tax year end as long as the chosen date does not result in the first year exceeding 12 months.

An estate will begin the tax year on the date of death and may end on December 31 of that year. However, the executor has the option to instead use a fiscal year and have the tax year end on the last day of the month before the month the decedent died. This may afford the executor more time to file if the decedent died close to December 31 since the estate tax return is generally due four months after the close of the tax year.

And, keep in mind that the above discussion is only applicable to the federal Form 1041. Just like your own taxes, trusts and estates may also need to file a separate state tax return (in New York, the IT-205) which is subject to a different set of rules.

If you are a fiduciary and have questions regarding a trust or estate and whether you have to file a tax return, we recommend that you consult with an experienced tax attorney or accountant.

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