Where should I report trust income?

[Anonymous]

My mother-in-law passed away early this last year. I reported income from her trust on her personal tax return, but when filling out the 1041 using TT Business, it asks for a tax payment based upon that same income. In years past, her tax preparer didn't file a return on behalf of the trust, and reported any income on her personal return. Is that the right way to do it, or do I need to report it twice, and pay taxes on the earnings from the trust?

[MichaelL1 · Accepted solution]

While living the income is reported on 1040.  The living trust while living, you report all the income as you normally would and disregard the living trust.

After death, the income then goes on 1041, until distributed to the heirs.  

So if someone, for example, died during the year and had $1,200 of dividend income.  That dividend income up to the date of death is on 1040, then after the date of death on the 1041.  So in my example, if someone died March 31st and would have $300 dividend income on the 1040 and $900 income on 1041. 

[jtax]

@bladelink I am very sorry for your loss.

I'm not sure you can prorate the yearly income. I think you need to figure out what income was pre date of death and post date of death. @TurboTaxMichaelL1 do you have authority for pro-rating?

The trust becomes irrevocable after the date of death and will need its own Tax ID (EIN), which is not usually needed during the grantor/settlor/donor's life.

Note if the 1099s have post-death income reported on your mother-in-law's SSN, you will have to list those as nominee distributions on her final 1040 (subtracting those) and issue a 1099 from your mother-in-law to the trust. Sometimes brokers are good at issuing two 1099s (on to the person, one to the trust/estate), other times they just don't care.

See Pub 559 for more info. <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/p559.pdf">https://www.irs.gov/pub/irs-pdf/p559.pdf</a>

[MichaelL1]

You would only pro-rate in my example dividends if you could not determine what was earned prior to death, and what was after death. Normally you will be able to determine this by looking at the source of the income.

Income to Include – Generally, the decedent’s income on the final return only includes income derived up to the date of death.  Post-death income is taxable to the decedent’s estate or trust, but the estate or trust will generally pass the taxable income on to the beneficiaries for inclusion in their individual returns if the income has actually been distributed to the beneficiaries during the same reporting period.