This Deskbook cuts through the complexity of preparing fiduciary income tax returns. It provides step-by-step guidance on the basics of Form 1041 preparation as well as more complex issues, such as determining fiduciary accounting income and distributable net income (DNI), computing the distribution deduction, allocating capital gains and depreciation, reporting income in respect of a decedent, filing Form 1041 in the estate or trust's final year, understanding the reporting requirements for foreign trusts, and more.
Detailed examples, filled-in tax return forms, and planning tips show you how to report income, deductions, and distributions. The companion Quick Reference Binder contains fiduciary tax organizers to help compile the necessary information for preparing Form 1041, as well as numerous tables, practical worksheets, checklists, and election statements to help save time and effort when preparing 1041s.
Some of the important new features you will find in the latest edition, which has been updated for the 2010 Tax Relief Act, include:
Deducting Investment Advisory Fees. The IRS recently re-issued proposed regulations on determining which fees are subject to the 2% of AGI limitation, rather than being fully deductible. The new proposed regulations clarify when the limitation applies, exceptions from the limitations, and whether bundled fees must be allocated between those that are subject to the limitation and those that are not. This edition includes a detailed discussion of this issue.
Electing to Use Modified Carryover Basis Rules. The IRS issued new guidance on the due date for making the election, special rules for allocating the basis increase to community property, the holding period and character of assets acquired from the decedent, and how to calculate depreciation on property acquired from the decedent. This update provides up-to-date information on this new guidance.
Disposition of Passive Loss Activity at Death When Modified Carryover Basis Rules were Elected. If the decedent died in 2010 and the executor elected the modified carryover basis rules, the rules for computing the property’s tax basis and deducting any unused passive activity losses is significantly different than the general rules. This edition provides guidance on the special rules that apply in this situation.
Alternative Minimum Tax (AMT) for Modified Carryover Basis Property. If property is subject to the modified carryover basis rules, the treatment of tax differences between assets acquired from the decedent that have different cost bases for regular tax purposes versus AMT purposes is unclear. This update describes the problems that may arise and offers potential solutions.
Integration with UltraTax CS™.PPC’s 1041 Deskbook on Checkpoint ® integrates directly with UltraTax CS™. Quickly find the correct answers to your tax preparation questions – directly from your input screen! Simply click on the PPC icon on the UltraTax CS™ screen and the PPC Deskbook guidance and practice aids directly dealing with that input screen topic will display. Don’t spend valuable time keyword searching or browsing a table of contents for your answer. Clicking on the relevant link takes you directly to the information you need! For information on UltraTax CS or to view a demo of the integration with PPC Deskbooks, visit http://cs.thomson.com/tax/quicklook.aspx. Call 800-431-9025, option 1, to find out more!
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Advantages of an Intentionally Defective Grantor Trust (IDGT)
Powers Commonly Used to Create an Intentionally Defective Grantor Trust
KEY ISSUE 26I Supplemental Needs, Special Needs, and Disability Trusts.
Supplemental Needs and Special Needs Trusts
Disability Trusts
Tax Treatment of Supplemental Needs Trusts
KEY ISSUE 26J When Grantor Trust Status Ends.
Tax Consequences
Income Tax Reporting in the Final Year
KEY ISSUE 26K Reporting Requirements for Domestic Grantor Trusts.
General Rules
Standard Reporting Method
Alternative Reporting Methods
Changing Methods of Reporting
Grantor Reporting Requirements
ILLUSTRATION 26-1: Table B (7.0% and 7.2%)
ILLUSTRATION 26-2: Table S (7.0%)--Based on Life Table 2000CM
ILLUSTRATION 26-3: Sample Completed Form 8855
ILLUSTRATION 26-4: Form 1041 for Partial Grantor Trust (Crummey Power)
ILLUSTRATION 26-5: Attachment to Form 1041 Reporting Grantor Trust Information
ILLUSTRATION 26-6: Form 1041 for a Grantor Trust Required to File Form 1041
ILLUSTRATION 26-7: Statement of Income, Deductions, and Credits Attributed to Grantor
ILLUSTRATION 26-8: Final Form 1041 and Statement of Grantor Income and Expenses
ILLUSTRATION 26-9: Statement of Income, Deductions, and Credits Attributed to Grantor
ILLUSTRATION 26-10: Form 1099-INT, Form 1099-DIV, and Statement of Income, Deductions, and Credits Attributed to Grantor
Chapter 27: Foreign Trusts
Introduction
KEY ISSUE 27A Distinguishing between a Foreign Trust and a Domestic Trust.
Foreign and Domestic Trusts Defined
Court Test
Control Test
Inadvertent Change in Trust Status Due to Change in Fiduciary
KEY ISSUE 27B Determining Whether a Foreign Trust Is a Grantor Trust or a Nongrantor Trust.
KEY ISSUE 27C Gain Recognition on Certain Transfers to Foreign Trusts.
General Rules
Exceptions to Gain Recognition
Exception for Transfers to Foreign Grantor Trusts
Exception for Transfers to Unrelated Foreign Trusts for FMV
Exception for Certain Transfers at Death
KEY ISSUE 27D Foreign Trusts with U.S. Owners.
General Rules
Determining Whether the Trust Has a U.S. Beneficiary
Tax Treatment upon Death of U.S. Owner of Foreign Grantor Trust
Domestic Trust That Becomes a Foreign Grantor Trust
KEY ISSUE 27E Foreign Grantor Trusts with Foreign Owners.
Can Foreign Grantors Be Treated as Owners?
Tax Consequences of Foreign Ownership
KEY ISSUE 27F Foreign Nongrantor Trusts.
U.S. Taxation on Different Types of Income
Calculating Distributable Net Income and the Income Distribution Deduction
Foreign Tax Credit (or Deduction)
Reporting Current Distributions to U.S. Beneficiaries
Reporting Current Distributions to Foreign Beneficiaries
Reporting Accumulation Distributions to U.S. Beneficiaries (Throwback Rules)
KEY ISSUE 27G Applying U.S. Tax Treaties.
Purpose of U.S. Tax Treaties
Who is Eligible for U.S. Tax Treaty Benefits?
Disclosing a Treaty-Based Position
KEY ISSUE 27H Reporting Requirements of Foreign Grantor Trusts With U.S. Owners, U.S. Grantors, and U.S. Beneficiaries.
Trustee of Foreign Trusts with a U.S. Owner
Reportable Events
U.S. Grantor
U.S. Owner
U.S. Beneficiary
KEY ISSUE 27I Reporting Requirements of Foreign Nongrantor Trusts and Beneficiaries.
U.S. Person with Reportable Event
Domestic Trust that Becomes a Foreign Nongrantor Trust
Foreign Nongrantor Trust U.S. Tax Returns
U.S. Beneficiary Receiving Distributions from a Foreign Nongrantor Trust
Foreign Beneficiary Receiving Distributions from a Foreign Nongrantor Trust
ILLUSTRATION 27-1: Partially Completed Form 1040NR for Foreign Nongrantor Trust
ILLUSTRATION 27-2: Sample Statement under IRC Sec. 643(d) for Allocating Backup Withholding Payments under IRC Sec. 3406
ILLUSTRATION 27-3: Partially Completed Form 3520 to Report U.S. Beneficiary's Distributions from Foreign Trust
ILLUSTRATION 27-4: Partially Completed Form 3520 Showing Transfer to a Foreign Trust
COMPREHENSIVE CASE STUDIES
Chapter 28: Simple Trust with Rental Property
Introduction
KEY ISSUE 28A Depreciation Reserve Not Required.
Facts
Conclusions
KEY ISSUE 28B Depreciation Reserve Maintained.
Facts
Conclusions
KEY ISSUE 28C Depreciation Reserve Required, but Not Maintained.
Facts
Conclusions
ILLUSTRATION 28-1: Completed Form 1041 and Related Schedules for Simple Trust with No Depreciation Reserves
ILLUSTRATION 28-2: Completed Form 1041 for Simple Trust with Depreciation Reserves
Chapter 29: Complex Trust with Oil and Gas Royalty and Depletion Reserve
Introduction
KEY ISSUE 29A Distributions Exceed Distributable Net Income (DNI).
Facts
Conclusions
KEY ISSUE 29B Distributions Exceed Fiduciary Accounting Income (FAI) but Not DNI.
Facts
Conclusions
KEY ISSUE 29C Distributions Less than DNI and FAI.
Facts
Conclusions
ILLUSTRATION 29-1: Completed Form 1041 and Related Schedules for Complex Trust with Depletion Reserves and Distributions Exceed DNI
ILLUSTRATION 29-2: Completed Form 1041 and Related Schedules for Complex Trust with Depletion Reserves and Distributions Exceed FAI but Not DNI
ILLUSTRATION 29-3: Completed Form 1041 and Related Schedules for Complex Trust with Depletion Reserves and Distributions Less than DNI and FAI
Chapter 30: First Year of an Estate
Introduction
KEY ISSUE 30A When Form 706 Is Not Required.
Facts
Conclusions
KEY ISSUE 30B When Form 706 Is Required.
Facts
Conclusions
ILLUSTRATION 30-1: Completed Form 1041 for an Initial Estate Year
Chapter 31: Termination Year of a Trust
Introduction
KEY ISSUE 31A Excess Deductions and Capital Loss in Terminating Year.
Facts
Conclusions
KEY ISSUE 31B Capital Gain in Terminating Year.
Facts
Conclusions
ILLUSTRATION 31-1: Form 1041 for Trust with Capital Losses and Excess Deductions in the Termination Year
ILLUSTRATION 31-2: Beneficiary Letter in Termination Year
ILLUSTRATION 31-3: Form 1041 for Trust with Capital Gain in Terminating Year
ROADMAP RM Roadmap to Form 1041
ROADMAP RM-1 Introduction
ROADMAP RM-2
Roadmap to Guidance for Completing Form 1041, Pages 1-2
QUICK REFERENCE TABLES
TABLE T101: Federal Income Tax Rates for Estates and Trusts (2009-2012)
TABLE T102: 2010-2012 Estate and Gift Tax Rates
TABLE T103: Applicable Credit and Applicable Exclusion Amount
TABLE T104: Capital Gains, Holding Periods, and Maximum Rates for 2011
TABLE T201: Directory of State Taxation Departments
TABLE T301: Summary Table of Trusts
TABLE T302: Summary of Income Tax Filing Requirements for Estates and Trusts
TABLE T303: Summary of Depreciation Recapture Rules
TABLE T304: Filing Requirements for Split-Interest Charitable Trusts
TABLE T305: Summary of Valuation Tables for Split-Interest Charitable Trusts
TABLE T306: Tax and Information Reporting Forms for Foreign Trusts and Beneficiaries
TABLE T307: Taxpayer Penalties
TABLE T308: Return Preparer Penalties
TABLE T309: List of States Following the Original or One of the Revised Uniform Principal and Income Acts
TABLE T310: Comparison of the 1931, 1962, and 1997 Uniform Principal and Income Acts
TABLE T401: Interest Rates on Overpayments and Underpayments (2003-2011)
TABLE T402: Section 7520 Rates (2008-2011)
DEPRECIATION TABLES
TABLE D101Recovery Periods for Common Assets
TABLE D102Summary of Regular Tax Depreciation Rules, Assets Placed in Service after December 31, 1986 (or July 31, 1986, if Election Made)
TABLE D103Summary of AMT Depreciation Rules, Assets Placed in Service after December 31, 1986
TABLE D104Recap of Required and Elective Depreciation Methods for Both Regular Tax and AMT
TABLE D105Summary of Depreciation Allowable in Year of Disposition
TABLE D201MACRS Personal Property, Half-year Convention
TABLE D202MACRS Personal Property, Midquarter Convention--1st Quarter
TABLE D203MACRS Personal Property, Midquarter Convention--2nd Quarter
TABLE D204MACRS Personal Property, Midquarter Convention--3rd Quarter
TABLE D205MACRS Personal Property, Midquarter Convention--4th Quarter
TABLE D301MACRS Residential Rental Real Property Placed in Service after 1986 and AMT Residential Rental Real Property (27.5-year Property)
TABLE D302MACRS Nonresidential Real Property Placed in Service before May 13, 1993 (31.5-year Property)
TABLE D303MACRS Nonresidential Real Property Placed in Service after May 12, 1993 and AMT Nonresidential Real Property Placed in Service after 1998 (39-year Property)
TABLE D304MACRS Qualified Leasehold Improvement Property, Qualified Restaurant Property, and Qualified Retail Improvement Property [IRC Sec. 168(e)(3)(E) (15-year Property)
ELECTIONS
ELECTION E101: Trust or Estate Charitable Contributions Treated as Paid in Preceding Tax Year
ELECTION E102: Waiver of Right to Deduct Administration Expenses or Casualty/Theft Losses on Form 706
ELECTION E103: Disclosure Statement Regarding Estate Administration Expenses or Casualty/Theft Losses Claimed on Both Form 706 and Form 1041
ELECTION E104: Recognizing Gain on Property Distributions
ELECTION E105: Allocating Estimated Tax Payments to Trust or Estate Beneficiaries
ELECTION E106: Treating Distributions Made within the First 65 Days of a Year as Made in the Prior Year
ELECTION E107: Special Income Tax Treatment for Qualified Funeral Trusts
ELECTION E201: Electing the Alternative Minimum Tax (AMT) Depreciation Method for Regular Tax
ELECTION E202: Using Straight-line in Lieu of MACRS Depreciation
ELECTION E203: Electing Out of MACRS Depreciation
ELECTION E204: Adopting the Alternative Depreciation System (ADS) for Regular Tax
ELECTION E205: Electing out of Bonus Depreciation
ELECTION E206: Bond Premium Amortization
ELECTION E207: Bond Market Discount Accrued Using the "Constant Interest Rate" Method
ELECTION E208: Including Accrued Bond Market Discount in Current Income
ELECTION E209: Accruing Interest on U.S. Savings Bonds
ELECTION E210: Revoking Income Accrual Election on U.S. Savings Bonds
ELECTION E301: Forgoing the NOL Carryback Period
ELECTION E302: Qualified Subchapter S Trust (QSST) Treated as a Permitted Shareholder
ELECTION E303: Refusing to Consent to a Qualified Subchapter S Trust (QSST) Election
ELECTION E304: Revoking a Qualified Subchapter S Trust (QSST) Election
ELECTION E305: Reducing Basis by Items of Loss or Deduction before Nondeductible Expenses and Certain Oil and Gas Depletion
ELECTION E306: Valuing Charitable Contributions of Certain Property Interests Using a Preceding Month's Section 7520 Rate
ELECTION E307: Including Net Capital Gain and Qualified Dividend Income in Investment Income
ELECTION E308: Electing Entity Tax Status
ELECTION E309: Electing Small Business Trust (ESBT) Treated as a Permitted Shareholder
ELECTION E310: Converting a QSST to an ESBT
ELECTION E311: Converting an ESBT to a QSST
ELECTION E312: Adjusting the Basis of Distributed Partnership Assets
ELECTION E313: Electing out of Estate Tax for Decedents Who Died in 2010
CHECKLISTS
CHECKLIST C101: Checklist for Due Diligence Review of Form 1041
CHECKLIST C102: Form 1041 Preparation Checklist
CHECKLIST C103: Form 5227 Preparation Checklist
CHECKLIST C104: Form 1041-A Preparation Checklist
CHECKLIST C105: Final Form 1041 Planning Checklist
CHECKLIST C106: Avoiding a Section 6694 Return Preparer Penalty
CHECKLIST C201: Classification of an Entity as a Liquidating Trust--Non-Chapter 11 Bankruptcy Plans
CHECKLIST C202: Classification of an Entity as a Liquidating Trust--Bankruptcy Plans under Chapter 11
WORKSHEETS
WORKSHEET W101: Income Allocation Worksheet
WORKSHEET W102: Statement of Income, Deductions, and Credits Attributed to Grantor
WORKSHEET W103: Undistributed Net Income Carryover
WORKSHEET W403: Modified Carryover Basis Worksheet (IRC Sec. 1022)
RESOURCES
RESOURCE R101: Fiduciary Tax Organizer (Form 1041)--Initial Year as Client
RESOURCE R102: Fiduciary Tax Organizer (Form 1041)--Subsequent Year as Client
RESOURCE R103: Summary of Trust Instrument
RESOURCE R104: Summary of Decedent's Will
RESOURCE R201: Sample Engagement Letter for Fiduciary Income Tax Returns
RESOURCE R301: Transmittal Letter for Fiduciary Tax Organizer (Form 1041)
RESOURCE R302: Transmittal Letter for Fiduciary Income Tax Returns with ES Vouchers
RESOURCE R303: Transmittal Letter for Fiduciary Income Tax Returns without ES Vouchers
RESOURCE R304: Transmittal Letter for Grantor Trusts Required to File Form 1041
RESOURCE R305: Transmittal Letter for Schedule K-1
RESOURCE R401: Filing Instructions for Federal Fiduciary Income Tax Return
RESOURCE R402: Filing Instructions for State Fiduciary Income Tax Return
RESOURCE R403: Filing Instructions for Fiduciary Estimated Tax Payments
RESOURCE R501: Model Financial Statements for an Estate
GLOSSARY
CPE & Training Solutions
INDEX
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INTRODUCTORY MATERIAL
ABOUT THE AUTHORS...
