Estate Form 1041 tax year-end

[DoNTaxesNow]

Date of death was 6/30/09, so normal max year-end is 5/31/2010, and return due by 9/15/2010. No income received by the estate until September 2009. Is there any rule to allow the election to use a tax year of 9/1/09 to 8/31/10?
No return has been filed yet... is there a legitimate argument that a return for the period 6/30/09 to 8/31/09 was not required since there was no income to the estate?

Reason to shift the tax year, if possible, is due to a sizeable refund of medical expenses in July that were deducted on decedent's 2009 (final) 1040, and some additional admin. expenses paid after May.
If I can't shift the tax year, and a 2nd year Form 1041 is required, the beneficiary will lose the benefit of excess deductions, and will pay tax on the medical expense refund.

I considered amending the final 1040, but don't think it is proper way to handle the refunded medical expenses since the refund came over a year after date of death.

Thank you for your suggestions.

[Burke]

For a decedent's estate, the moment of death determines the end of the decedent's tax year and the beginning of the estate's tax period. You cannot ignore the first 2 months and have an INITIAL tax year starting later than the date of death. However, the executor or administrator chooses the estate's tax period when he files its first income tax return. The estate's first tax year may be ANY period of 12 months or less that ends on the last day of a month. If he selects the last day of any month other than December, he is adopting a fiscal tax year. So the executor may make such election as to maximize the year in which income and deductions are credited. After the first year, the estate's tax year will be successive periods of 12 months, unless it terminates. The final year may be a short year. No income tax return is required unless gross income for the tax year selected is $600 or more. You may wish to file one anyway in order to establish tax years.

PS. Normally an executor notes the end of the accounting year on the application for EIN. However, that does not mean he is locked into that date, as the election is made when the tax return is filed.

[DoNTaxesNow]

Thanks for the reply Burke

I guess my thought was not to ignore the first 2 months, but to use them as the estate's first, short tax year; with the argument that no return would be required for this period as the estate had no income in those first 2 months.
Then use the 12 months of Sept - Aug as the next tax year... which would also be the final year. I was hoping to find a reg to specifically allow or disallow my idea.

This is one of those "simple" returns that I have turned into a research project to try to save the beneficiary a few bucks in tax.... all because of an unexpected refund of medical expenses coming in after what was going to be the end of estate business..

Thanks again for your thoughts.

[Burke]

The scenario you suggest is entirely allowed. The first tax year can be two months. And the next tax year would be twelve months (or less if the estate terminates.) I don't know what the Reg is, if any, but it is specifically stated as written in my first post in the instructions for Form 1041 under "Accounting Period." I would file the return for the first two months, however, to document the election of the estate's tax year, even if little or no income is reported. There should have been some expenses, like qualifying?

[DoNTaxesNow]

In the first 2 months there is less than $200 income and less than $300 expenses.
You don't see a problem with filing the 2-month initial return this late?
Don't suppose we should send in both returns together...

Thanks Burke.

[Burke]

Under the circumstances, I would send both together. Note that the first one's box should be marked Initial Return, and the fiscal year indicated at the top. Since there will be no tax due, and really no "requirement" to file, there is no penalty for filing late. You can attach a note "for informational purposes only" or something like that if you wish. If the estate is closed as of 8/31/10, then the second year would be marked Final. The estate is closed when all distributions have been made and there are no more funds. You will have to use the 2009 tax forms for the second and final return, showing its fiscal year at the top. The income and deductions will pass through to the bene's on the K-1's for the 2010 tax year. I usually send a letter to them to this effect so they understand this, as the K-1 will have 2009 in big, bold numbers at the top. Even though the fiscal year is indicated, they usually don't notice it. .

[DoNTaxesNow]

Hey Burke - Thank you.

I like your suggestions to send both returns together. I also agree with sending a beneficiary letter explaining the tax year issue... I usually do this for every K-1 we send out.
I appreciate your replies and advice.

It appears that I may be filing the initial return for only 1 month to 7/31/09, with no income or expenses on it, and then the 2nd & final return will be thru 7/31/10. Same concept, just adjusting the year-ends.

Thanks again.