1041 us income tax return for estates and trusts: If a trustee paid an attorney to complete trust income tax forms; can the trustee deduct the attorney's fees on the tax return? Also, does the trustee need to have the attorney complete a W-9? (The trustee received the bill from the attorney after the 2015 tax forms were submitted. So can the trustee deduct the fees on the 2016 income tax forms?)
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Legal fees to administer the Estate or Trust are legitimate deductions on the Form 1041. They are deductible in the year of the expenditure, so if paid in 2016, deductible in 2016. While you can always issue a Form 1099-MISC for payments made to a vendor [the attorney is not your employee], in my experience, I've never seen a Trustee issue a tax information report on payments made for legal services.
[2018 Tax Year Update] The following statement remains true however the TCJA tax law of 2018 eliminated the deductibility of legal fees on a personal 1040, so beware!
In the Final Year of the Trust or Estate, if the fees and other deductibles exceed the taxable income, the excess deductions can be passed through to the Beneficiaries for their use on their own Form 1040s. [note 2018 update]
For how to enter the tax accounting of executor fees paid see the following for the details.
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See the attached multipage PDF that walks you through the process in a Final Year of a Form 1041 allocating income, excess deductions, and other distributable amounts to the beneficiary.
2018 UPDATE - BEWARE THAT MISCELLANEOUS AND OTHER DEDUCTIONS ARE DISALLOWED 2018-2025) Excess Deductions occur only upon termination of the entity during the last tax year of the trust or decedent's estate, and when the total deductions (excluding the charitable deductions and the exemption available to the entity) are greater than the gross income for the entity for the year. These 'excess deductions' are reported in Box 11 of the Schedule K-1 (Form 1041) with a code of 'A'. Generally, a deduction based on a Net Operating Loss carryover is not available to the beneficiary as an excess deduction. However, if the final year tax return (Form 1041) filed by the trust or estate is also the final year in which the NOL carryover can be taken by the entity, then the NOL carryover may be taken as an excess deduction. For additional information see: Publication 536 - Net Operating Losses (NOL's) for Individuals, Estates or Trusts, also see 26 CFR 1.642(h)-4 - Excess deductions on termination of an estate or trust
See the attached multipage PDF that walks you through the process in a Final Year of a Form 1041 allocating income, excess deductions, and other distributable amounts to the beneficiary.
Excess Deductions occur only upon termination of the entity during the last tax year of the trust or decedent's estate, and when the total deductions (excluding the charitable deductions and the exemption available to the entity) are greater than the gross income for the entity for the year. These 'excess deductions' are reported in Box 11 of the Schedule K-1 (Form 1041) with a code of 'A'. Generally, a deduction based on a Net Operating Loss carryover is not available to the beneficiary as an excess deduction. However, if the final year tax return (Form 1041) filed by the trust or estate is also the final year in which the NOL carryover can be taken by the entity, then the NOL carryover may be taken as an excess deduction. For additional information see: Publication 536 - Net Operating Losses (NOL's) for Individuals, Estates or Trusts, also see 26 CFR 1.642(h)-4 - Excess deductions on termination of an estate or trust
Can professional fees be accrued on the final Form 1041?
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