I am the personal rep and the sole beneficiary of my late husband's estate worth only $900. Do I really have to file Form 1041 and send a K-1 to myself?

[jmueck9123]

He died in Sept of 2014. I didn't file anything in 2015 because the estate had no value. In 2015 his estate received $900 from his employer and it was reported on a 1099-R for 2015.

[ToddL]

Yes, but.....

From the IRS Instructions for Form 1041.  Who Must File, Decedent's Estate

The fiduciary (or one of the joint fiduciaries) must file Form 1041 for a domestic estate that has gross income for the tax year of $600 or more, or a beneficiary who is a nonresident alien. The tax rate would be 15% ($135)

So what happens if you don't file for a Form 1099-R reporting $900 income? If the Recipient Identification Number on the Form-1099-R  was your husband's SSN, the IRS would likely send you send you a notice of Proposed Increase in Taxes  (November?). They will calculate the tax due and you can send them a check (no return necessary). 

In the unlikely circumstance that they ask you file a Form 1041, you may be stuck. There would be the tax and potential penalties. You may be able to avoid filing the return by sending the IRS a letter explaining why you hadn't filed, and ask for abatement of any penalty for interest charges. There would be the tax and potential penalties.  More information follows, and you can Contact Us for assistance. 

The law provides a penalty of 5% of the tax due for each month, or part of a month, for which a return isn't filed up to a maximum of 25% of the tax due (15% for each month, or part of a month, up to a maximum of 75% if the failure to file is fraudulent). If the return is more than 60 days late, the minimum penalty is the smaller of $135 or the tax due.

The penalty won't be imposed if you can show that the failure to file on time was due to reasonable cause. If you receive a notice about penalty and interest after you file this return, send us an explanation and we will determine if you meet reasonable-cause criteria.

Late Payment of Tax

Generally, the penalty for not paying tax when due is 12 of 1% of the unpaid amount for each month or part of a month it remains unpaid. The maximum penalty is 25% of the unpaid amount. The penalty applies to any unpaid tax on the return. Any penalty is in addition to interest charges on late payments. 

[jmueck9123]

Recipient Identification Number on the Form-1099-R is my husband's EIN number not SSN. I fully intend to file form 1041 this year if that is what I should do. His estate should get a $600 exemption on Line 20 on Form 1041 leaving only $300 to pay tax on. Should I have the estate pay tax on $300 or give it all to myself and pay tax on the extra $300 on my own return?

[ToddL]

Let the estate pay the tax, since it is the estate's income. Presumably what is left after paying the taxes goes to you, tax-free.

[dmertz]

You would only pass this income through to yourself on a Schedule K-1 if the marginal tax rate for reporting this income on your own tax return would be less than the 15% income tax rate that the estate pays on the first $2,500 of the estate's taxable income.

[jmueck9123]

Thank you. I would be better off to have the estate pay the taxes. Do I need to file any forms besides a 1041? Do I need to report the tax-free inheritance on my own taxes?

[dmertz]

Form 1041 should be all you need.  This income will go on line 8.  With no other income during the estate's tax year (you can use a calendar year or a fiscal year) and no deductions, this will also appear on line 22 (reduced by the $600 exemption, see below) on which the tax is calculated. With this income treated as income taxable to the estate, it will not be reported anywhere on your personal tax return.

[jmueck9123]

One more quick question. Can I still claim the $600 exemption on line 20?

[dmertz]

Yes, sorry, I forgot about that.  The amount on line 22 will be the amount on line 8 reduced by the $600 exemption on line 20.

[jmueck9123]

Thank you so much. I think I am ready to file now.

[zinnanti2017]

The information above regarding a 1041 filing is not correct. The $900 is not income generated by the estate. It is income in respect of decedent ("IRD") - earned but unrealized prior to death. Without meeting the "more than $600" threshold, there is no 1041 filing requirement. The $900 is to be treated as ordinary income on the income beneficiary's return, subject to deduction for any estate tax liability (which there appears to have been none). So, it's $900 that flows through to your 1040 and gets taxed at the resulting marginal rate. Further, if you remained unmarried, you can still file MFJ for the tax reporting period in which your husband passed.

Lastly, I am sorry for your loss. I deal a lot in probate and trust admin.

[dmertz]

You are commenting on a 2-year-old post, so further discussion is unlikely to be affect what the original poster has already filed.  The post is in regard to income to the estate in the year following the year of the death of the decedent and therefore not properly includible on the deceased's final tax return.

This IRD paid to the decedent's estate is part of the gross income to the estate (26 U.S. Code § 691) for the estate tax year and must be included in the total that is compared to the $600 gross-income threshold for filing.  $900 is more than $600, so the decedent's estate was required to file Form 1041 to report this income.  The income paid to the decedent's estate flows through to the estate beneficiary by passing through on a Schedule K-1 (Form 1041).

[zinnanti2017]

Obviously, the TP/executor has likely filed. But, the response remains published. And, thanks for pointing out that $900 is more than $600.

I think the response is properly qualified with respect to when the IRD is received and whether there has been a final 1040; in this case an MFJ filing as decedent's final 1040. If it's IRD realized within the tax year that decedent passed, then it would simply be attributed to decedent's final 1040. On these facts, receipt of IRD after a final 1040 has presumably been filed, a 1041 reporting is appropriate.