Is an income distribution deduction required on a final 1041 or can the estate pay the entire tax owed?.

[dzimmer10]

I am filing the final 1041 for the estate.  All funds have been distributed in 2018. Can I choose to have the estate pay the tax rather than pass the liability on to the beneficiaries?

[tagteam · Accepted solution]

" Can I choose to have the estate pay the tax rather than pass the liability on to the beneficiaries?"

No, not if all funds were distributed in 2018 and your final 1041 for the estate covers that tax year.

The distribution you made in 2018 carries with it distributable net income (DNI) which would be taxable to the beneficiary(ies) who received the distribution.

[ron6612]

If the final 1041 distributes all income to beneficiaries on their K-1 and the income gets reported on their respective 1040's and flows through to their state returns does this preclude the need for the trust to file a state tax return?  The 1099 shows the state to which the fiduciary of the trust resides in.

[tagteam]

That would be entirely dependent upon the state; there are slightly different rules for many of them.

See https://www.actec.org/assets/1/6/Morrow_State_Residency_and_Source_Income_Factors_for_Taxation_of_Ir...

[ron6612]

This is from Maryland website:  Maryland follows the federal income tax treatment for fiduciaries of trusts and estates. Under the federal income tax rules, generally any income that is distributed by the fiduciary of the trust or estate during the tax year is not taxable to the trust or estate. Instead, that income is taxable to the beneficiary. Any income not distributed or partially distributed by the fiduciary of the trust or estate during the tax year is taxable to the fiduciary of the trust or estate.

Based on this information do you think only a 1041 needs to be filed and the income would then be automatically distributed to respective state tax returns?  I could then not have to prepare the 504 for Maryland even though have received trust interest income and 1099 for Maryland?

[WendyN2]

Yes, regardless of the State one should always file a final return with the IRS and the "residing state". It is a record keeping system for the States, that is all. 

[tagteam]

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@ron6612 wrote:

Based on this information do you think only a 1041 needs to be filed and the income would then be automatically distributed to respective state tax returns? 

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Did you even bother to read the information at the link I provided in the post immediately above your post? 

In short, if the estate meets the threshold income requirements and is a resident estate (or non-resident estate with MD source income), then a state return is required to be filed.