Fiduciaries - Income Taxation

Question 1

What are 2 entities under fiduciaries category?

Answer 1

Trust and estate

Question 2

Which form is used for fiduciaries?

Answer 2

Form 1041.

Question 3

When is filing due?

Answer 3

On the 15th day of the fourth month after the close of the tax year.

Question 4

What is the tax year for trust? Estate?

Answer 4

Trust: must use a calendar year.
Estate: may use a calendar or any fiscal taxable year beginning on the death date.

Question 5

How is the income taxed?

Answer 5

Some taxed on fiduciary, some on the beneficiary.

Question 6

How is double taxation avoided?

Answer 6

By a distribution deduction for fiduciary.

Question 7

What happens to the character to income taxed to beneficiaries? What is this approach called?

Answer 7

Retains its character.

A conduit approach.

Question 8

Who are deduction and credits allowed/disallowed similar to?

Answer 8

To individual tax payer with some exceptions.

Question 9

Who can deduct the estate’s administration costs and losses during the administration of the estate?

Answer 9

Deducted by either the estate’s fiduciary income tax return, or on the estate’s federal estate tax return.

Question 10

Can administration costs be deducted both on fiduciary’s return and the estate tax return?

Answer 10

No.

Question 11

Are state inheritance or estate taxes deductible by estates or individual TPs?

Answer 11

No.

Question 12

Are state and local taxes deductible by estates or individual TPs? What are examples of those taxes?

Answer 12

Yes.

Income taxes, personal ad valorem property taxes, and real property taxes.

Question 13

Where do extraordinary items such as proceeds from fire allocated to? Do they generate taxable income?

Answer 13

To principal.

No.

Question 14

What is the treatment of charitable contribution?

Answer 14

Deducted in full. No AGI limitation.

Question 15

What is the treatment of contribution to foreign charities for fiduciaries? For other TPs?

Answer 15

F: deductible.
Other: Deduction not allowed.

Question 16

What is the treatment of fiduciary accounting income distributed to the beneficiaries?

Answer 16

Deductible.

Question 17

What are personal exemption amount allowed for fiduciaries? Standard deduction?

Answer 17

• $600 for estates.
• $300 for simple trust and for complex trust that distribute all their income currently.
• $100 for all other complex trusts.

No standard deduction allowed.

Question 18

What are 3 criteria for simple trust?

Answer 18

(1) is required to distribute all of its income to designated beneficiaries every year, (2) has no beneficiaries that are qualifying charitable organizations, and (3) makes no distributions of trust corpus (i.e., principal) during the year.

Question 19

What is IRD?

Answer 19

Income in respect of a decedent.

Income that was earned by the decedent but not constructively received before death.

Question 20

Where is IRD included?

Answer 20

In the gross estate for estate tax purpose and also in taxable income for the estate.

Question 21

Who pays the tax for income not distributed? Distributed?

Answer 21

Not: Estate/trust.
Distributed: Individual TP.

Question 22

What is DNI? What is this used for?

Answer 22

Distributable net income: the maximum amount that the entity can use as a distribution deduction for the year and the maximum amount that TP can be taxed.

To compute the amount allowed for deduction for estate/trusts to avoid double taxation of distributed income.

Question 23

Is the beneficiary taxed the total amount of DIN? Why?

Answer 23

No, may be taxed less than DNI since DNI includes tax-exempt interest.

Question 24

What is the formula for DNI?

Answer 24

Taxable income
+ Net tax-exempt income (less any expenses for it)
+ Personal exemption
+ Net capital loss
- Net capital gains allocable to corpus
+ Net capital gain allocable to beneficiaries
= Distributable net income

Question 25

Question:
A died in Yr 4, leaving everything to her only child. A’s will gave full discretion to the estate’s executor re: distribution of income.
For Yr 5, the DNI was $15,000, of which $9,000 was paid to the beneficiary. None of the income was tax exempt.
What amount can be claimed on the estate’s Yr 5 fiduciary income tax return for the distributions deduction?

Answer 25

Deduction = amount of distribution.
This amount can’t exceed DNI, which didn’t happen.
Therefore, $9,000.

Question 26

When is charitable contribution allowable?

Answer 26

Only if the decedent’s will specifically provides it.

Question 27

Must trust and estate make quarterly estimated tax pmts? Exception?

Answer 27

Yes.
except that an estate is exempt from making estimated tax payments for taxable years ending within two years of the decedent’s death.

Question 28

What kind of trust is it when an individual create a trust and retains certain interest?

Answer 28

the trust is known as a grantor trust and the income from the trust is taxed to the grantor.