Video: Guide to a Fiduciary Income Tax Return

Hello, I'm Scott from TurboTax with some important information about fiduciary income tax returns.

Just like your obligation to pay income taxes and file a return, trusts and estates must do so as well. However, filing a tax return for either of these entities requires you to prepare Form 1041, which many refer to as a fiduciary income tax return.

When you create a trust, it's likely that you will be transferring personal assets to it such as real estate and investments. At that point, it's the trust that owns the property, not you. But this doesn't mean that it can earn income tax free.

For example, suppose you transfer cash to the trust, which holds the funds in an interest bearing savings account. Since interest is taxable, the trust must pay the income tax on it each year. This is why the trustee must prepare a tax return for the trust on Form 1041.

The same concept applies to a decedent's estate that isn't immediately distributed to heirs at the time of death.

Suppose, for example, a family member passes away, but because of problems with their will, it takes some time before you and other heirs can take property from the estate. If the estate earns income during this period, the person responsible for administering the estate must report it on a 1041 form.

Keep in mind, however, that the income an estate reports on a 1041 is unrelated to the estate tax. The income tax covers the earnings of estate assets, whereas the estate tax covers the value of the assets.

Just like personal tax returns, the estate or trust can report deductions on the 1041 for things like the payment of taxes and the fees paid to the fiduciary, which is usually the trustee or the person who administers the estate. And if the estate or trust sells property at a loss, this too can potentially reduce its taxable income.

If you need to prepare a federal tax return for an estate or trust using Form 1041, use our TurboTax Business product. You'll also need to use one of our personal tax products for your individual tax return.