When a person passes away, his property is placed into an estate and undergoes probate, which is the legal process of dividing up the assets. Sometimes this process cannot be resolved within a year and some of the assets in the estate generate income. This income needs to be reported to the IRS through a return beyond any estate tax calculation. As a result, tax forms are filed with the IRS. The K-1 is one of the schedules completed during this process, and it is meant to notify the beneficiaries of the estate what has occurred over the past taxable year.
Estates in General
When a person dies his property is placed into an estate to be held in trust until all of the decedent's assets are settled and the property can be divided appropriately. The estate is looked after by an administrator who is responsible for ensuring that the estate complies with the law. With regard to taxes, the administrator is responsible for applying for an Employer Identification Number for the estate, filing the last tax return from when the decedent was alive, paying estate tax if applicable and reporting any income earned by the estate after the decedent's death.
Estates and Income Taxes
When an estate needs to report income it earned during the year, it does so by filing a 1041. If the estate had gross income of $600 or more, or a beneficiary that is a nonresident alien, it must file. The return must be filed on the 15th day of the fourth month following the close of the estate's tax year. On the 1041, the administrator of the estate is responsible for disclosing all of the income that the estate earns. The most common types of income are interest from investments and rents from property held by the estate. The estate is also allowed to take some deductions, such as attorney and fiduciary fees and taxes paid by the estate. The tax rate for the estate's income tax ranges from 15 to 35 percent, depending on how much income the estate earns.
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The K-1 is a report describing a beneficiary's share of the income and deductions accumulated by an estate. Parts I and II of the K-1 details the information about the estate and the personal tax information of the beneficiary. Part III details the beneficiary's share of the income and deductions. Unlike the underlying assets of the estate, which are only taxable at the estate level, the income and deductions listed on the beneficiary's K-1 must be included in the beneficiary's tax return.
Tax Tips and Disclaimer
For complex returns, consult with a tax professional, such as a Certified Public Accountant or licensed attorney, as she can best address your individual needs. Keep your tax records for at least seven years to protect against the possibility of future audits. Every effort has been made to ensure this article's accuracy, but it is not intended to be legal advice.