1041 trust return questions

[anethum]

I'm the successor trustee for my mom's revocable trust. She died last year and I'm working on the 1041 trust tax return. I've done my parents' regular tax returns for many years using software. But there don't seem to be many software options for individuals preparing 1041 returns. I've been using TaxAct software for the 1041, but I'm having a hard time finding answers to some questions.

Most, but not all of the estate was distributed last year. I believe that since distributions were made last year, the trust won't be paying income tax, but the heirs will have to pay income tax on their personal returns based on the trust income shown on the K-1 forms I'm generating. (The income was mainly mutual fund money market dividends from the proceeds of the house until distributions took place.) My understanding is that I'll need to file a final 1041 after the distributions are completed this year.

I signed a contract to sell my mom's house less than a month after she died, so I'm presuming no capital gain or loss. However at settlement, there was a significant "Recordation tax" paid to the state, and significant state and county "Transfer taxes". These are shown on the Settlement Statement as taxes and they are significant sums. Are those taxes deductible anywhere on the 1041? Will they affect what's reported on the K-1 forms I'll be generating.

Finally, I didn't take any payment as trustee last year. However, I may this year (I did all of the work for years allowing mom with dementia to remain in her home.) I haven't been able to find out anywhere if I would have to pay FICA taxes if I take payment for my work as trustee. Also, could any payment I take as trustee go into my Roth account?

TaxAct wasn't very helpful in answering my questions, but from reading the IRS Instructions for form 1041, it sounds like expenses paid for the house after death but before settlement (utilities, homeowners insurance, lawn care) are NOT deductible. Is that correct?

I'd greatly appreciate any clarification. Thanks.

 

[ncbill]

I used TurboTax Business for years.

Not cheap (over $100) but easy to use versus H&R Block's software that generates 1041s.

Transfer taxes were not much, largest expense (Realtor fee) came straight off the house's sales price in the software (lowered gross proceeds)

Since those were under $250k no 1099-S was required.

EDIT: IIRC, all expenses related to the house sale, including taxes, went to reducing gross proceeds.

K-1s generated for the beneficiaries where needed.

 

[GrayHare]

Condolences on the loss of your mom. I believe you deduct real estate recordation and transfer taxes from the sale price. This will likely result in a capital loss since the house had only a month to appreciate from when your mom passed. As you may know, cost basis of the house is determined via appraisal. I would expect trust expenses like utilities ARE deductible against trust income. I believe trustee fees are not considered earned income, so are not subject to FICA, and are not eligible for IRA contribution. All of the above is fuzzy to me, so you should seek confirmation.

 

[anethum]

Since I haven't yet paid for the TaxAct software, I may abandon it and try TurboTax Business. The prices are similar. FWIW, I used TurboTax individual tax return software for years. I switched to H&R Block software last year and preferred it. However, H&R Block business software has lousy reviews.

IRS Instructions for line 15a ("Other Deductions") for form 1041 say:

"Ownership costs are costs that are
chargeable to or incurred by an owner of property simply by
reason of being the owner of the property. These costs are
commonly or customarily incurred by a hypothetical
individual owner of such property and are not deductible by
an estate or non-grantor trust. Under section 67(b), they
include, but are not limited to, condominium fees, insurance
premiums, maintenance and lawn services, automobile
registration and insurance costs, and partnership costs
deemed to be passed through to and reportable by a partner.
Other expenses incurred merely by reason of the ownership
of property may be fully deductible under other provisions of
the Code." (emphasis mine)

eta: Most of the original homes in my parents' neighborhood sell directly to developers as teardowns, and I was virtually certain that would be the case with their home. I contacted all of the developers who had been sending cards & letters to the address for years, and I sold to one of them directly though there was less interest than there would have been before interest rates began to rise. So there were no realtor fees. By selling to a builder, I didn't have to completely empty the house, though I substantially cleared it out. Most things were either donated to local charities or were trash. My parents weren't hoarders, but they had lived in the house for over 65 years.

 

[Texas Proud]

I used TurboTax Business for years.

Not cheap (over $100) but easy to use versus H&R Block's software that generates 1041s.

Transfer taxes were not much, largest expense (Realtor fee) came straight off the house's sales price in the software (lowered gross proceeds)

Since those were under $250k no 1099-S was required.

EDIT: IIRC, all expenses related to the house sale, including taxes, went to reducing gross proceeds.

K-1s generated for the beneficiaries where needed.

+1 on TurboTax for trusts... I used it for my mom's estate for 3 years... really easy IMO...

 

[GrayHare]

I think the last part is key in "Under section 67(b), they include, but are not limited to...costs deemed to be passed through to and reportable by a partner." I interpret that to mean the trust cannot deduct costs that are passed to a partner (because that partner would then deduct those costs). If correct, costs NOT passed along to a partner CAN be deducted by the trust. Maybe others will chime in with thoughts.

 

[Montecfo]

I also use TT business.