Suppose date of death was August/2010. When applying for an EIN number they ask for accounting year. If you enter December, then will have the estate have to file a 1041 for year 2010? If you enter August, then the estate only has to file a 1041 on August/31/2011 (with a 3 month extension to file the return)? The second option would be advantageous as then there's less work to do now, and the estate beneficiaries would report the income on their 2011 tax return.
The filing deadline of a 1041 is just like that of a 1040 - 15 days into the fourth month after the fiscal year. That's not an extension. You can request an extension (again, similar to a 1040 filing).
As to using a fiscal year that is different from a calendar year - you will have to get (or estimate, I suppose) income figures through the middle of the calendar year (e.g. August) for the estate. 1099s are only issued on a calendar year basis so you won't have this info available. This may not matter if all that's in the estate is a bank account paying interest, but if you've got anything the slight bit complex (even something like percentage of a bond fund that's tax-exempt), things can get dodgy. See Pub 538 on accounting periods. If the estate stops generating income by the end of 2010, then this isn't a problem. Otherwise, using a short year (choice 1) may turn out to be easier.
Finally, in most cases if the estate does not distribute assets to the beneficiaries within its tax year, then the income remains with the estate, rather than getting passed through to the beneficiaries. If the income is small, this can be advantageous, as the estate gets a $600 exemption (and then is in the 15% bracket for another $2300).
Why is it necessary to estimate the income from August to December of
2010? From the 1041 instructions:
When To File
For calendar year estates and trusts, file Form 1041 and Schedule(s) K-1 on or before April 18, 2011. For fiscal year estates and trusts, file Form 1041 by the 15th day of the 4th month following the close of the tax year. If the due date falls on a Saturday, Sunday, or legal holiday, file on the next business day. For example, an estate that has a tax year that ends on June 30, 2011, must file Form 1041 by October 17, 2011.
You must provide Schedule K-1 (Form 1041), on or before the day you are required to file Form 1041, to each beneficiary who receives a distribution of property or an allocation of an item of the estate.
The above suggests the K-1 is only due along with the 1041,so if the fiscal year ends in August, the K-1 is only due 4 months from August/
2011, and the income would appear on the individual's 2011 tax return.
Not necessarily - in the year of death everyone and anyone who was issuing any kind of income statement reporting item to the decedent is SUPPOSED TO issue the statement to the estate for all disbursements that occurred AFTER the DoD. Since the vast majority of issuers DON'T issue separate statements - either because they don't know how, don't care about it or were never informed that it needed to be done - the person in charge of the estate is going to have to schedule out income on some sort of a spreadsheet ANYWAY.
Remember, individuals are cash basis so ONLY the income received while they were alive is their's. Income earned but paid out after death belongs to the estate. For example, when my father retired he had 60-days of sick leave built up. The company policy was that 90-days AFTER retirement they would cut a check to pay out the accumulated leave (they waited 90-days under the premise that the employee in question MAY come back to work. Frankly, I think this was crap they just wanted to hold onto the cash - but I digress).
Dad retired on December 1 and was buried on December 23. The company cut the check to my mother in April of the following year. Here's where it gets good - THEY actually withheld FICA taxes and issued a W-2 to my mother. We were never able to get them to correct this. In their defense they truly believed they were doing the right thing. BUT it left us with detailing the income by dates, using a spreadsheet, and filing the tax returns correctly.
So simply electing a calendar year is NOT always easier just because its a calendar year.
You also have to keep in mind that most folks who get named to settle an estate have an emotional investment in the deceased. Most of these folks are not ready emotionally to do the work necessary to file a short year return for the estate. In fact, I normally extend the personal returns AND the estate returns to give the family time to grieve and get things sorted out before I even start the returns.
I'm not sure the estate actually has to pass assets through to the beneficiaries for the INCOME to pass through to the beneficiaries. I know I know this, I just wrap my head around it at the moment.
One known issue is that IF estate taxes are due, they are due on a VALUE that may not have any correlation to actual cash. For example, if the estate winds up with a $30M building to the estate then estate taxes are due on the value (minus the exclusion amount) regardless of whether there is any cash to pay those taxes. Since estate taxes are due within 9 months of DoD, by electing a fiscal year return you won't delay the actual estate taxes BUT you may be able to effectively postpone income taxes from income generating assets into the following year by using a fiscal year for the Decedent's Estate Return.
This is addressing how income in the calendar year of death is allocated between deceased and estate, which as you said is independent of reporting year chosen. But the added difficulty of using a fiscal year is not in allocating income, but in quantifying it. Specifically, in determining precisely the estate income generated in the part of the fiscal year that falls in the _next_ calendar year. (For example, income in Jan-Aug for a fiscal year running from Sept to Aug.)
IRD.
Because you chose a non-calendar year FY (presumably ending some month end between April 30th and Nov 30th), you may have had to estimate income received by the estate between Jan 1 and the ending month of the fiscal year.
On the other hand, had you used calendar years, you would have had complete figures (1099s) for the short year, and you would have had complete figures for the second calendar year (W2: on cash basis, check was cut in the second calendar year of the estate; and 1099s).
That's certainly a major consideration. I've been speaking strictly of the mechanics.
As you noted, the income belongs to the estate. Thus it is an asset of the estate, which is then distributed to the beneficiaries. You may be thinking of 1041 Schedule B, line 9, which effectively imputes distribution of income even if there has been no actual distribution (i.e. if the will required present distribution of income).
Now that's an interesting strategy. If someone dies in February, then income generated through the following January could be distributed that January, and the beneficiaries wouldn't have to include it in their income taxes until the subsequent December. Since the distribution would have been within the first FY, the estate would not be liable for income taxes on the income.
Say the fiscal year runs from August 2010 through July 2011. You'll have 1099s for the 2010 income (Aug - Dec), but what about the income from Jan 2011 through July 2011? Filing deadline is Nov 15, 2011, and even if you get an extension, there are some forms you might not have in time (e.g. K1 from partnerships or LLCs that also filed for extensions). On a non-calendar year basis there's always the possibility (depending on income sources) of having to file prior to getting final income figures. Not because of the first half of the fiscal year (Aug - Dec
2010), but because of the latter half (in 2011).
The headache is for the executor/administrator filling out the 1041 in the middle of a calendar year, not for the beneficiaries who get the K-1 "early" for their 2011 calendar year tax returns.
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