Estate Tax

As estates go, 2000 is not large.

I would just report this income on the beneficiary's 1040,

If the IRS asks about it, very factually let them know that there was no estate EIN taken out, that the beneficiary is Jane Doe, and she delcared this income on her current year 1040, just as if the estate had received and distributed it to her.

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Follow Art's advise. Don't reopen Probate.or 1041. Your problem is how to get the check cashed. There are many ways if you can't figure it out.

ed

See also the "nominee 1099" procedure. This means you file a 1099-DIV with the decedent as payor and the true recipient as payee.

Thanks for the input...

I have a similar question. My wife's estate has an EIN and about 10k income in 2008 and some in 2009. The estate is not yet closed but could be in about a month, the 1041 is due by the end of July. Does the estate pay the income tax or do the beneficiaries( her children)? If the estate is liable as I have been assuming, is it ok if I paid the tax myself? Does the IRS care who pays it?

My objective here is simply to avoid any IRS problems and get the most money possible to her kids as soon as possible.

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The tesstate pays it to make sure it's paid. It';s the estates's income anyway.

ed

The estate pays tax on all income it hasn't distributed to beneficiaries.

Out of curiosity, to which beneficiary or beneficiaries will this 2k be distributed?

The estate rates are much higher than the individual tax rates, so it's better to distribute everything ASAP.

The OP didn't specify, so how should I know?

beneficiaries.

Wrong. Not everything. An estate gets a $600.00 exemption; why not use it?

Yeah, I forgot about the exemption. It might be handy for a small amount like $2000. The estate tax would be on taxable income of $1400, and 15% of $1400 is $210, so the estate tax is $210 if the $2000 is not distributed.

Then when the $2000 is distributed to beneficiaries, is it taxable to them?

Second scenario. Say the estate distributes the $2000 to beneficiaries right away, there is no tax for the estate right, but is there tax for the beneficiaries? The original post said that the estate was very small, which I imagine to be under the $2 million estate exemption in 2007, so assuming that the original estate plus this $2000 is still under $2 million, it seems there should be no tax for the estate or the beneficiaries.

That's Estate INCOME Tax, and if the estate pays it, the distribution of the remainder is tax free to the beneficiaries

If the estate pays the income tax on $2000, the remainder ($1790) is distributed tax free to the beneficiaries. No K-1 is necessary (or needed).

You are confusing Estate Tax and Estate Income Tax. Quite different creatures. The first (computed on Form 706) is a tax on the "wealth" of the decedent's estate. The estate always pays that tax, NOT the beneficiaries. If the executor distributes the assets of the estate (and the FMV exceeds $2M, pre-2009) before that tax is paid, the executor may be on the hook for the tax bill.

The Estate Income Tax is reported annually on Form 1041, and includes only income earned by the estate post-death. Either the estate or the beneficiaries can pay that tax bill, choice of the executor, although it is usually done by distribution to the beneficiaries via K-1, and they include the income on their individual tax returns. The 1041 is filed for each year that the estate has income of $600 or more. Point is, if the estate has income, somebody has to pay the income tax, and it is perfectly acceptable to keep that tax bill as low as possible (legally, of course).

In my case one beneficiary lives and works in Canada ( a landed immigrant) and the other works and is resident in New Zealand. They both have well paying jobs. I'm not sure how or where they would be taxed on a US estate income distribution. The estate income would be equally distributed. They are both still US citizens.

Thanks for any advice.

If they are still US citizens, they should be filing returns with the IRS and, if appropriate, paying US taxes. Thus, their living abroad should not affect the tax consequences of a distribution. As this is not earned income, it is not eligible for the foreign earned income exclusion.

Lanny K Williams, CPA Nawarat, Williams & Co., Ltd. Income Tax Services for Expatriate Americans

I was thinking, maybe this is a case of the broker's or company's records not being updated. The original post said that the $2000 was a dividend payment. So there must be underlying shares. In general, I imagine the broker or company has a big database of the name and social security number of each person who owns shares, and how many shares they own, so that they know how much dividend to pay. So maybe the broker's or company's records were not updated at the time of death. If this is true, then the trust should pay no tax, the money should be distributed to the beneficiaries, and they should report it on Schedule B. That is, this is like the nominee dividend concept mentioned in one of the other posts. And they should also update the broker's or company's records. Note that this way they could end up paying more tax, such as 15% on the entire $2000 with no exemption if the dividends are qualified, or 28% if the dividends are not qualified. The exact rate of course depends on how much the beneficiaries make, and could be as low as 5% or as high as 35%. Also, if the dividend was 20k, then the trust tax would almost certainly be higher.

Thanks for setting the clarification.