Gary Bode, CPA: if tax preparation of an Estate's Form 1041 gets worrisome, consider calling us at 399-2705 for a free initial consult.
I did my own tax preparation for Form 1041, but the Excess Deductions on Termination (Line 11A of Form 1041’s Schedule K-1) can’t be used on my personal Form 1040?
Background: Form 706, Form 1041 and Schedule K-1
When a loved one dies, there are usually multiple “one of” tasks that require attention, exacerbating an emotionally difficult time. Two of these are the Estate’s taxes.
True Estate Tax presents on Form 706. After extensive confusion from Congress, an Estate doesn’t pay any tax per se if it is under $5 Million in 2011. Form 706 terms, definitions and calculations are tricky and you should consult with your local CPA before using your own calculations.
“Deducting Line 11A, of Schedule K-1 of the Estate’s Form 1041 (Excess Deductions on Termination) on your own Form 1040 is a two tiered process through Schedule A. See below. So they may not actually lower your own tax liability.”
Gary Bode, CPA in Wilmington NC
The Income an Estate earns, while it is in existence, presents on IRS Form 1041. Form 1041 uses multiple sub-schedules to calculate its Taxable Income based on a calendar or fiscal year. As with most tax forms, you must report income, but have the right to deduct expenses. Deductions are not always the same as defined on Form 1040. So you have to careful with tax Form 1041 tax preparation. While the main concepts may look familiar, there are differences.
Schedule K-1 encapsulates all the information on Form 1041 and allocates it by beneficiary for use in preparing their own Form 1040. Of course the IRS gets a copy too, so they look for this info on the beneficiary’s return.
Excess Deductions on Termination
Sometimes the Estate’s deductions exceed the income. So no tax is due from Form 1041. The excess deductions flow through Form 1041 into Line 11a of Schedule K-1. It sounds like you’re looking for these on your Form 1040’s Schedule E, which is the initial placement for Schedule K-1s from Estates, Corporations and Partnerships. But Excess Deductions on Termination go into the Other Deductions section of Schedule A (Itemized Deductions). As such they have to be more than 2% of your Adjusted Gross Income to do you any good in Round 1 of lowering your own taxes. Round Two? The sum of all sections of Schedule A have to exceed the Standard Deduction. So, it is a two tier process for the excess deductions from Form 1041 to do you any good on your personal return.
I’m a CPA in Wilmington NC offering Form 1041 tax preparation for Estates. And the associated State returns, too, of course. If self preparation gets worrisome, please consider giving us a call at (910) 399-2705 for a free initial consult. Our posts should give you a feel for our expertise and proactive attitude.
