Question

Hershel Barker was the president and majority shareholder in Bulldog, Inc. He was a cash-basis taxpayer who reported his income on a calendar-year basis. On March 1, 2011, Hershel was killed in a skiing accident. The estate has elected to report its income on a calendar-year basis. Dividends of $10,000 had been declared by Bulldog, Inc. on February 3, 2011, payable March 4, 2011, to shareholders of record on February 17, 2011. Hershel's executor received the dividends. Should executor report the dividend on Form 1040 or Form 1041?

Answer 1

Form 1040

Form 1040 is the full personal income tax return that anyone can file regardless of the amount of their income. This is the form used for itemizing deductions, claiming first time home buyer credit or if your income exceeds $100,000. Also if you are self employed you are required to complete the full Form 1040. While the form is more complicated, it may also allow you to pay the lowest amount of taxes, depending on the deductions you qualify for.

Form 1041

The 1041 is the income tax return for estates and trusts. An estate or trust is treated as its own entity as far as taxes are concerned. The 1041 includes all income and deductions that are allowed per the IRS guidelines. However any distributions that are made to beneficiaries of the estate or trust are filed on a schedule K-1. The estate or trust does not pay taxes on the distributions to beneficiaries. The tax liability for distributions is reported on the beneficiary's personal income tax return. According to IRS instructions for Form 1041, "the fiduciary of a domestic decedent's estate, trust or bankruptcy estate" uses the form to report several different types of incomes or losses from that estate.

Therefore , according to the case law given above, the executor should report the dividend in FORM 1041.