With all the decisions you have to make while administering an estate, income tax planning may not cross your mind. Yet there are opportunities to save tax dollars when filing the required income tax returns, which include Form 1040, the final individual income tax return, and Form 1041, the federal income tax return for the estate or trust.
One example for potential tax savings is choosing a tax year. Though only income received or accrued at the date of death is reported on the final Form 1040, the return is due at the usual time, generally April 15 of the following year. The estate, however, can choose to file an income tax return (Form 1041) based on a fiscal year. Why would you want to?
One reason is to allow the postponement of tax on income that remains in the estate. Another is to spread income over more than one year, which may be advantageous for both the estate and the beneficiaries.
Expenses offer opportunities for planning as well. For instance, you know the general rule for medical expenses: You deduct them on Form 1040 in the year you pay them. However, you can make an election on the final federal income tax return to deduct the medical expenses paid within a year of the date of death.
Planning note: Depending on the size of the estate, you may choose instead to report the expenses on the estate return, Form 706.
Please call us to discuss other elections and planning opportunities for personal and estate income tax returns. We’re ready to help you achieve the best possible results for the estate and the beneficiaries.
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