If you let a loved one die in 2020, you may need to file taxes on an estate or trust.
When a person dies, their property belongs to an estate. All income from assets in this estate is income from the estate. If the estate generates income greater than $ 600, the estate is responsible for paying income taxes.
This is what you need to know about property and trust taxes. If you’re just looking for the best tax software in general, check out our guide to the best tax software here.
Basics of estate and trust tax
If you had a parent or spouse who died in the last tax year, you will likely need to file a tax return for that person. That person’s income received during their lifetime should be submitted as part of a regular tax return. You can use any popular tax software program to manage the income of the deceased in their life.
In addition to the person’s lifetime income, you may need to file a return for their estate. Income earned after the death of the deceased is added to his estate. This can include posthumous rental income, royalties, or even income from business transactions. If an estate earns more than $ 600, it must file an IRS Form 1041.
The estate can deduct a variety of expenses and distributions, including:
- Income distributions to the beneficiaries
- Expert fees
- Enforcement costs
- Other necessary costs for the distribution of assets
If the estate distributes income to the beneficiaries, they must prepare Schedule K-1 forms for each beneficiary. The beneficiaries then have to pay taxes on the income.
For example, a property generates $ 5,000 in revenue from a rental property. It pays $ 500 for advice from a lawyer. The remaining $ 4,500 will then be passed on to five beneficiaries. The estate is responsible for creating five unique Schedule K-1 forms for each beneficiary.
While the estate is in estate, the estate must request an Employer Identification Number (EIN) in order to correctly submit Form 1041. It’s easy to submit an EIN online. Once you have an EIN for the trust, you can file tax (Form 1041) on the estate.
What tax software can be used to file taxes for an estate or foundation?
It is common for estates to hire a professional to file escrow taxes on estates. Finally, generating K-1 forms and figuring out the rules for Form 1041 can be complex and time consuming. However, those responsible for a relatively small estate can decide to file taxes themselves.
Almost all estate tax programs are aimed at tax professionals. This includes software such as TaxSlayerPro, Drake Tax, ProConnect Tax Online (from Intuit), CrossLink and TaxWise. But each of these companies had prohibitively expensive prices or seemed inaccessible to beginners.
We were only able to find two software packages that will allow you to file Form 1041 and issue Schedule K-1 forms. H&R Block allows users to submit Form 1041, but it does not generate K-1 forms for beneficiaries.
TaxAct Estates and Trusts is more focused on estates and trusts than the TurboTax business. TurboTax may be easier to use for properties with many business deductions (e.g., rental charges and depreciation).
I received a K-1 from an estate. What should I do?
If you received a K-1 from an estate, you are responsible for paying taxes on the income you received. Income is considered ordinary income, so tax is paid at your marginal tax rate.
Most major tax programs (with the exception of Credit Karma Tax) support K-1 form income. We like TaxHawk, H&R Block, and TaxSlayer especially for people who need to submit multiple income plans.
These programs provide detailed instructions on how to transfer information from your tax form to your tax return. Usually this is very easy to do in a control program.
Consider seeking professional help
The person responsible for an estate does not have to file taxes themselves. It may make more sense to work with a professional tax advisor to make sure you don’t miss out.
A tax professional can help ensure that everything is done correctly and that deductions are maximized. If you need help from a professional, read this guide on how to find a tax advisor near you.