Form 1041 - 1099-MISC with recipient "To the estate of..."

[sirgalavant]

My sister's husband passed away in 2020.    His company

paid out his accrued vacation/sick pay via a 1099-MISC statement made out "To the estate of ...".  My sister had to deposit this into a bank acct in the name of "Estate of ...."

which only earned less than $100 in 2020.  She has been using these funds to pay for cremation, lawyer fees, medical bills, his loan payment on car in his name, etc.  

My question is:  would the $'s on the 1099-MISC get reported on a normal 1040 tax return or does she need to file a 1041 estate return.  Like I said, the earnings on the account was less than $100 for the year. 

[gloriah5200]

Your sister handled the accrued vacation/sick pay payout from his employer correctly.  

Per IRS Publication 559, when a taxpayer dies during the year, the income received on behalf of the taxpayer after his/her death would be paid to his/her estate.

The income earned by the taxpayer while the taxpayer was still alive in the year of death would be filed on his final individual income tax return.

The estate is responsible for the payment of the decedent's final expenses and debts.

If there was a will in effect that the wife was to inherit at death all the assets of the decedent after his death, then it is up to her to carry out the wishes of the decedent in the will.

Your sister also probably needs to contact Probate to carry out that part of the estate actions, too.

In this situation, the estate bank account only earned less than $100, but the estate also earned the 1099-MISC, which is considered income also, which is probably enough to require the decedent's estate to file an income tax return, form 1041 for the year.

[sirgalavant]

Thank you.  That is what I thought.  So, I'll have her file the 1099-MISC on the 1041 along with any interested earned while sitting in a bank account and everything else that he earned while alive on the 1040. 

[sirgalavant]

Thank you!!

[sirgalavant]

OK.  So, after other allowable deductions (line 15a form 1041), the amount left is $13K.  Can my sister now disburse that to herself as a beneficiary (Sch B line 15; line 18 form 1041) and

complete a K-1 to herself with (k-1 form 1041 line 6) Income of

$13K and now report that $13K on her 1040? 

If so, what happens to the $600 exemption (1041 line 21)?  Would she pay taxes on that exemption with the 1041?

[gloriah5200]

She is also responsible for paying his final taxes and any other debts that may arise.  If she distributes the full amount of estate assets, then the estate will be closed.

Does she owe any probate taxes?  Has she spoken to the Probate Department to find out?

It is often a good idea to leave some assets in the estate in case some additional debts arise or if the tax return owes a tax liability.  Once it is past the time that she things any debts may arise, she can close the estate and make the final distributions to herself.

Exemption Deduction

An estate is allowed an exemption deduction of $600 in figuring its taxable income. No exemption for dependents is allowed to an estate. Even though the first return of an estate may be for a period of less than 12 months, the exemption is $600. If, however, the estate was given permission to change its accounting period, the exemption is $50 for each month of the short year.

An exemption is not taxable and does reduce taxable income for the estate

[sirgalavant]

thank you

[haru]

I read this very helpful reply, as I had a similar question regarding 1099 income that will be reported by the employer next year, the year after my partner's death on July 30, 2020.

For 2020, I will file his final 1040. Since there was no other income to him or to the estate by 12/31/2020,  I do not file a 1041 for last year. Got it.

But I did receive a check in January of this year for his final salary/PTO.

Since it didn't arrive in 2020, I won't get that 1099 until next year.

Do I report (and pay income taxes) and that amount on a 2021 Form 1041?

(And might I be wise to file a 1041 for 2020 anyway, even with $0 income, so there's a record of the estate's tax ID already on record?)

ALSO... am I correct that any 401-K/pension I received as his beneficiary does not require reporting on a 1041, even though his accounts did increase in value before I moved them into an inherited IRA?

Super helpful thread. Appreciate the EXPERT feedback here, as well as just reading other threads. 

[Critter-3]

But I did receive a check in January of this year for his final salary/PTO.

Since it didn't arrive in 2020, I won't get that 1099 until next year.

Do I report (and pay income taxes) and that amount on a 2021 Form 1041?   Correct. 

(And might I be wise to file a 1041 for 2020 anyway, even with $0 income, so there's a record of the estate's tax ID already on record?)  Not needed. 

ALSO... am I correct that any 401-K/pension I received as his beneficiary does not require reporting on a 1041, even though his accounts did increase in value before I moved them into an inherited IRA?  Since you were paid as a beneficiary of that account you will report the income on your return not the estate.  In January you will get a 1099-R for any distributions you may have taken during the year.  As a non spouse bene you have 10 years to deplete the account. 

[haru]

Spot on and appreciated.

Im new on here.

Impressed by the depth and range of great questions with circumstances similar to many...and the solid replies.