The following is an example of a typical situation. All figures on
the filled-in forms have been rounded to the nearest whole dollar.
On April 9, 2000, your father, John R. Smith, died at the age of
62. He had not resided in a community property state. His will named
you to serve as his executor (personal representative). Except for
specific bequests to your mother, Mary, of your parents' home and your
father's automobile and a bequest of $5,000 to his church, your
father's will named your mother and his brother as beneficiaries.
After the court has approved your appointment as the executor, you
should obtain an employer identification number for the estate. (See
Duties under Personal Representatives, earlier.)
Next, you should notify the Internal Revenue Service Center where you
will file the tax returns of your father's estate that you have been
appointed his executor. You should use Form 56.
Assets of the estate.
Your father had the following assets when he died.
- His checking account balance was $2,550 and his savings
account balance was $53,650.
- Your father inherited your parents' home from his parents on
March 5, 1979. At that time it was worth $42,000, but was appraised at
the time of your father's death at $150,000. The home was free of
existing debts (or mortgages) at the time of his death.
- Your father owned 500 shares of ABC Company stock that had
cost him $10.20 a share in 1983. The stock had a mean selling price
(midpoint between highest and lowest selling price) of $25 a share on
the day he died. He also owned 500 shares of XYZ Company stock that
had cost him $20 a share in 1988. The stock had a mean selling price
on the date of death of $62.
- The appraiser valued your father's automobile at $6,300 and
the household effects at $18,500.
- Your father owned a coin collection and a stamp collection.
The face value of the coins in the collection was only $600, but the
appraiser valued it at $2,800. The stamp collection was valued at
$3,500.
- Your father's employer sent a check to your mother for
$11,082 ($12,000 - $918 for social security and Medicare taxes),
representing unpaid salary and payment for accrued vacation time. The
statement that came with the check indicated that no amount was
withheld for income tax. Since the check was made out to the estate,
your mother gave you the check.
- The Easy Life Insurance Company gave your mother a check for
$275,000 because she was the beneficiary of his life insurance
policy.
- Your father was the owner of several series EE U.S. savings
bonds on which he named your mother as co-owner. Your father purchased
the bonds during the past several years. The cost of these bonds
totaled $2,500. After referring to the appropriate table of redemption
values (see U.S. savings bonds acquired from decedent,
earlier), you determine that interest of $840 had accrued on the
bonds at the date of your father's death. You must include the
redemption value of these bonds at date of death, $3,340, in your
father's gross estate.
- On July 1, 1990, your parents purchased a house for $90,000.
They have held the property for rental purposes continuously since its
purchase. Your mother paid one-third of the purchase price, or
$30,000, and your father paid $60,000. They owned the property,
however, as joint tenants with right of survivorship. An appraiser
valued the property at $120,000. You include $60,000, one-half of the
value, in your father's gross estate because your parents owned the
property as joint tenants with right of survivorship and they were the
only joint tenants.
Your mother also gave you a Form W-2, Wage and Tax
Statement, that your father's employer had sent. In examining
it, you discover that your father had been paid $11,000 in salary
between January 1, 2000, and April 9, 2000, (the date he died). The
Form W-2 showed $11,000 in box 1 and $23,000 ($11,000 + $12,000)
in boxes 3 and 5. The Form W-2 indicated $2,305 as federal
income tax withheld in box 2. The estate received a Form
1099-MISC from the employer showing $12,000 in box 3. The estate
received a Form 1099-INT for your father showing he was paid
$1,900 interest on his savings account at the First S&L of
Juneville in 2000 before he died.
Final Return
for Decedent
Checking the papers in your father's files, you determine that the
$11,000 paid to him by his employer (as shown on the Form W-2),
rental income, and interest are the only items of income he received
between January 1 and the date of his death. You will have to file an
income tax return for him for the period during which he lived. (You
determine that he timely filed his 1999 income tax return before he
died.) The final return is not due until April 16, 2001, the same date
it would have been due had your father lived during all of 2000.
Since the check representing unpaid salary and earned but unused
vacation time was not paid to your father before he died, the $12,000
is not reported as income on his final return. It is reported on the
income tax return for the estate (Form 1041) for 2000. The only
taxable income to be reported for your father will be the $11,000
salary (as shown on the Form W-2), the $1,900 interest, and his
portion of the rental income that he received in 2000.
Your father was a cash basis taxpayer and did not report the
interest accrued on the series EE U.S. savings bonds on prior tax
returns that he filed jointly with your mother. As the personal
representative of your father's estate, you choose to report the
interest earned on these bonds before your father's death ($840) on
the final income tax return.
The rental property was leased the entire year of 2000 for $1,000
per month. Under local law, your parents (as joint tenants) each had a
half interest in the income from the property. Your father's will,
however, stipulates that the entire rental income is to be paid
directly to your mother. None of the rental income will be reported on
the income tax return for the estate. Instead, your mother will report
all the rental income and expenses on Form 1040. Checking the records
and prior tax returns of your parents, you find that they previously
elected to use the alternative depreciation system (ADS) with the
mid-month convention. Under ADS, the rental house is depreciated using
the straight-line method over a 40-year recovery period. They
allocated $15,000 of the cost to the land (which is never depreciable)
and $75,000 to the rental house. Salvage value was disregarded for the
depreciation computation. Before 2000, $17,735 had been allowed as
depreciation. For information on ADS, see Publication 946.
Deductions.
During the year, you received a bill from the hospital for $615 and
bills from your father's doctors totaling $475. You paid these bills
as they were presented. In addition, you find other bills from his
doctors totaling $185 that your father paid in 2000 and receipts for
prescribed drugs he purchased totaling $36. The funeral home presented
you a bill for $6,890 for the expenses of your father's funeral, which
you paid.
Because the medical expenses you paid from the estate's funds ($615
and $475) were for your father's care and were paid within 1 year
after his death, and because they will not be used to figure the
taxable estate, you can treat them as having been paid by your father
when he received the medical services. See Medical Expenses
under Final Return for Decedent, earlier. However,
you cannot deduct the funeral expenses either on your father's final
return or from the estate's income. They are deductible only on the
federal estate tax return (Form 706).
In addition, after going over other receipts and canceled checks
for the tax year with your mother, you determine that the following
items are deductible on your parents' 2000 income tax return.
| Health insurance |
$3,250 |
| State income tax paid |
891 |
| Real estate tax on home |
1,100 |
| Contributions to church |
3,800 |
Rental expenses included real estate taxes of $700 and mortgage
interest of $410. In addition, insurance premiums of $260 and painting
and repairs for $350 were paid. These rental expenses totaled $1,720.
Because your mother and father owned the property as joint tenants
with right of survivorship and they were the only joint tenants, her
basis in this property upon your father's death is $95,859. This is
found by adding the $60,000 value of the half interest included in
your father's gross estate to your mother's $45,000 share of the cost
basis and subtracting your mother's $9,141 share of depreciation
(including 2000 depreciation for the period before your father's
death), as explained next.
For 2000, you must make the following computations to figure the
depreciation deduction.
- For the period before your father's death, depreciate the
property using the same method, basis, and life used by your parents
in previous years. Since they used the mid-month convention, the
amount deductible for three and a half months is $547. (This brings
the total depreciation to $18,282 ($17,735 + $547) at the time of your
father's death.
- For the period after your father's death, you must make two
computations.
- Your mother's cost basis ($45,000) minus one-half of the
amount allocated to the land ($7,500) is her depreciable basis
($37,500) for half of the property. She continues to use the same life
and depreciation method as was originally used for the property. The
amount deductible for the remaining eight and a half months is
$664.
- The other half of the property must be depreciated using a
depreciation method that is acceptable for property placed in service
in 2000. You chose to use ADS with the mid-month convention. The value
included in the estate ($60,000) less the value allocable to the land
($10,000) is the depreciable basis ($50,000) for this half of the
property. The amount deductible for this half of the property is $886
($50,000 x .01771). See chapter 3 and Table A-13 in
Publication 946.
Show the total of the amounts in (1) and (2)(a), above, on line 17
of Form 4562, Depreciation and Amortization. Show the
amount in (2)(b) on line 16c. The total depreciation deduction allowed
for the year is $2,097.
Filing status.
After December 31, 2000, when your mother determines the amount of
her income, you and your mother must decide whether you will file a
joint return or separate returns for your parents for 2000. Since your
mother has rental income and $400 of interest income from her savings
account at the Mayflower Bank of Juneville, it appears to be to her
advantage to file a joint return.
Tax computation.
The illustrations of Form 1040 and related schedules appear near
the end of this publication. These illustrations are based on
information in this example. The tax refund is $1,101. The computation
is as follows:
| Income: |
| Salary (per Form W-2) |
$11,000 |
| Interest income |
3,140 |
| Net rental income |
8,183 |
| Adjusted gross income |
| $22,323 |
| Minus: Itemized deductions |
|
8,678 |
| Balance |
| $13,645 |
| Minus: Exemptions (2) |
|
5,600 |
| Taxable Income |
| $8,045 |
| Income tax from tax table |
| $1,204 |
| Minus: Tax withheld |
|
2,305 |
| Refund of taxes |
| $1,101 |
Income Tax Return
of an Estate--Form 1041
The illustrations of Form 1041 and the related schedules appear
near the end of this publication. These illustrations are based on the
information that follows.
Having determined the tax liability for your father's final return,
you now figure the estate's taxable income. You decide to use the
calendar year and the cash method of accounting to report the estate's
income. This return also is due by April 16, 2001.
In addition to the amount you received from your father's employer
for unpaid salary and for vacation pay ($12,000) entered on line 8
(Form 1041), you received a dividend check from the XYZ Company on
June 16, 2000. The check was for $750 and you enter it on line 2 (Form
1041). The estate received a Form 1099-INT showing $2,250
interest paid by the bank on the savings account in 2000 after your
father died. Show this amount on line 1 (Form 1041).
In September, a local coin collector offered you $3,000 for your
father's coin collection, and since your mother was not interested in
keeping the collection, you accepted the offer and sold him the
collection on September 22, 2000, receiving his certified check for
$3,000.
The estate has a gain from the sale of the collection. You will
have to report the sale on Schedule D (Form 1041) when you file the
income tax return of the estate. The estate has a capital gain of $200
from the sale of the coins. The gain is the excess of the sale price,
$3,000, over the value of the collection at the date of your father's
death, $2,800. See Gain (or loss) from sale of property
under Income Tax Return of an Estate-Form 1041
and its discussion, Income To Include, earlier.
Deductions.
In November 2000, you received a bill for the real estate taxes on
the home. The bill was for $2,250, which you paid. Include real estate
taxes on line 11 (Form 1041). (Real estate tax on the rental property
was $700; this amount, however, is reflected on Schedule E (Form
1040).)
You paid $325 for attorney's fees in connection with administration
of the estate. This is an expense of administration and is deducted on
line 14 (Form 1041). You must, however, file with the return a
statement in duplicate that such expense has not been claimed as a
deduction from the gross estate for figuring the federal estate tax on
Form 706, and that all rights to claim that deduction are waived.
Distributions.
You made a distribution of $2,000 to your father's brother, James.
The distribution was made under the terms of the will from current
income of the estate.
The income distribution deduction ($2,000) is figured on Schedule B
of Form 1041 and deducted on line 18 (Form 1041).
The distribution of $2,000 must be allocated and reported on
Schedule K-1 (Form 1041) as follows:
Step 1
Allocation of Income & Deductions
Type of
Income |
Amount |
Deductions |
Distributable
Net Income |
| Interest
(15%) |
$ 2,250 |
(386) |
$ 1,864 |
| Dividends
(5%) |
750 |
(129) |
621 |
| Other
Income
(80%) |
12,000 |
(2,060) |
9,940 |
| Total |
$15,000 |
(2,575) |
$12,425 |
Step 2
Allocation of Distribution
(Report on the Schedule K-1 for James)
| Line 1 - Interest ($2,000 x
1,864/12,425) |
$300 |
| Line 2 - Dividends ($2,000 x
621/12,425) |
100 |
| Line 5a - Other Income |
| ($2,000 x 9,940/12,425) |
1,600 |
| Total Distribution |
$2,000 |
Since the estate took an income distribution deduction, you must
prepare Schedule I (Form 1041), Alternative Minimum Tax,
regardless of whether the estate is liable for the alternative
minimum tax.
The other distribution you made out of the assets of the estate in
2000 was the transfer of the automobile to your mother on July 1.
Because this is included in the bequest of property, it is not taken
into account in computing the distributions of income to the
beneficiary. The life insurance proceeds of $275,000 paid directly to
your mother by the insurance company are treated as a specific sum of
money transferred to your mother under the terms of the will.
The taxable income of the estate for 2000 is $10,025, figured as
follows:
| Gross income: |
| Income in respect of a decedent |
$12,000 |
| Dividends |
750 |
| Interest |
2,250 |
| Capital gain |
200 |
| | $15,200 |
| Minus: Deductions and income
distribution |
| Real estate taxes |
$2,250 |
| Attorney's fee |
325 |
| Exemption |
600 |
| Distribution |
2,000 |
5,175 |
| Taxable income |
$10,025 |
Since the estate had a net capital gain and taxable income, you use
Part V of Schedule D (Form 1041) to figure the tax, $2,968, for 2000.
2001 income tax return for estate.
On January 6, 2001, you receive a dividend check from the XYZ
Company for $500. You also have interest posted to the savings account
in January totaling $350. On January 26, 2001, you make a final
accounting to the court and obtain permission to close the estate. In
the accounting you list $1,650 as the balance of the expense of
administering the estate.
You advise the court that you plan to pay $5,000 to Hometown
Church, under the provision of the will, and that you will distribute
the balance of the property to your mother, Mary Smith, the remaining
beneficiary.
Gross income.
After making the distributions already described, you can wind up
the affairs of the estate. Because the gross income of the estate for
2001 is more than $600, you must file an income tax return, Form 1041,
for 2001 (not shown). The estate's gross income for 2001 is $850
(dividends $500 and interest $350).
Deductions.
After making the following computations, you determine that none of
the distributions made to your mother must be included in her taxable
income for 2001.
| Gross income for 2001: |
| Dividends |
$500 |
| Interest |
350 |
| $850 |
| Less deductions: |
| Administration expense |
$1,650 |
| Loss |
($800) |
Note that because the contribution of $5,000 to Hometown Church was
not required under the terms of the will to be paid out of the gross
income of the estate, it is not deductible and was not included in the
computation.
Because the estate had no distributable net income in 2001, none of
the distributions made to your mother have to be included in her gross
income. Furthermore, because the estate in the year of termination had
deductions in excess of its gross income, the excess of $800 will be
allowed as a miscellaneous itemized deduction subject to the
2%-of-adjusted-gross-income limit to your mother on her individual
return for the year 2001, if she is otherwise eligible to itemize
deductions.
Termination of estate.
You have made the final distribution of the assets of the estate
and you are now ready to terminate the estate. You must notify the
IRS, in writing, that the estate has been terminated and that all of
the assets have been distributed to the beneficiaries. Form 56,
mentioned earlier, can be used for this purpose. Be sure to report the
termination to the IRS office where you filed Form 56 and to include
the employer identification number on this notification.
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