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Form 1041,Estate:"Tax Exempt Income" & allocation Questions

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    Form 1041,Estate:"Tax Exempt Income" & allocation Questions

    I am preparing a 1041 for an Estate and I have a couple of questions with respect to "Tax Exempt Income" (not tax exempt interest) which I need clarification and/or confirmation on.

    (1) Life Insurance paid to the estate due to the fact there was no named beneficiary on file. Based on my research, my position is that these proceeds would be considered "Tax-Exempt Income" and therefore expenses have to be allocated to this income. Is that correct? I know they are not included in gross income of the Estate for purposes of Form 1041.
    [2013 Form 1041 Instructions, page 21, "Allocation of Deductions for Tax-Exempt Income." It gives examples of tax-exempt income which includes "Certain Death Benefits (Section 101)." Section 101: With a couple of exceptions that don't apply to my case, the general rule states "gross income does not include amounts received under a life insurance contract, if such amounts are paid by reason of the death of the insured.]

    (2) Lump sum payment for retirement contributions. I'm reading from the document that accompanied the check: "You are entitled to a lump sum payment because of the death of a former employee. This payment covers only benefits due from the Retirement Fund and consists of any unused contributions the former employee made to the Fund or any accrued annuity payable at the time of his/her death." In the comments section of this document it reads: "This is the Employee Contributions for DECEASED. This is not taxable." So would this also be considered "Tax-Exempt Income" for purposes of allocating expense?

    Thanks in advance for your input.

    #2
    TTB Small Business Edition, page 21-13 says life insurance proceeds is included in the definition of tax-exempt income.

    That page also mentions death benefits as tax-exempt income. Death benefits are generally any benefit payable due to the death of the taxpayer. Thus, in my opinion, a retirement plan "death benefit" that is tax-exempt should likewise be included. The fact that it appears to represent the employee's basis in the retirement plan should not change anything, since the only reason why a retirement plan death benefit would be tax free is because it is a return of employee after tax contributions. Thus, when the 1041 instructions identify a "death benefit" as an example of tax-exempt income, I would have to assume that includes the return of after tax contributions to the employee's retirement plan.

    Comment


      #3
      Form 1041 instructions say:

      Allocation of Deductions for
      Tax-Exempt Income

      Generally, no deduction that would
      otherwise be allowable is allowed for
      any expense (whether for business or
      for the production of income) that is
      allocable to tax-exempt income.
      Examples of tax-exempt income
      include:
      Certain death benefits (section 101),
      Interest on state or local bonds
      (section 103),
      Compensation for injuries or sickness
      (section 104), and
      Income from discharge of
      indebtedness in a title 11 case (section
      108).
      Section 101 is life insurance. So yes, you include life insurance proceeds in the calculation.

      Comment


        #4
        I have reviewed these sections and have to agree with your assessment. Although not specifically addressed, your reasoning on the return of employee contributions makes sense in the context of allocating expenses on Form 1041 since the same applies to life insurance benefits. Just when you think you know everything.......

        Comment

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