Deceased Taxpayer question.....

[Connie]

I have a client that has brought me his mothers paperwork for both her personal tax return as well as her Trust. She operated a Care Center and the business was still in operation in 2007 under her Federal ID number for that. Family members kept it going due to the fact that a family member was a resident there. The mother passed away in 2006 and the family kept the business going until the family member passed away in 2007. The mother had set up a trust, but not all income was distributed to it. Can a taxpayer file a return the year after death? The family attorney insists that because the income for the business is paid by a governmental agency that this is the correct way to file. 1099 forms were also issued by the business of the deceased mother. Seems mess up to me. Suggestions?

[erchess]

A little help here

I don't think a 1040 can be filed for someone who was dead the whole taxable year. That is why their return for the year of death is known as their Final Return. I think that unless the person provided other arrangements, income that comes in after their death but would belong to them if they were alive belongs instead to their Estate. I don't know enough about Estates and Trusts to help you further but there are people on this board who can help you. Where are Bees and NYEA and Tax Bird?

[Bees Knees]

You file a Form 1041 for 2007 with Schedule C attached for the business income. You then choose to either pay tax at the 1041 tax rates, or pass the income through to the beneficiaries of the estate on Schedule K-1 by making a distribution of income.

You need to read Tab SB10 in TheTaxBook Small Business edition. Examples are provided to help you fill out the 1041.

[Roland Slugg]

F-1041

You mentioned that the woman/mother who died in 2006 had a trust. If the nursing home was owned by that trust (even it it was a revocable living trust), or if the business was transferred to the trust via her will, the business should have been reported on that trust's return. If that trust did not own the business, or succeed to its title after the owner died, then the business became an asset of her estate as of the day after her DOD.

The above post by Bees Knees is correct; the business income should be reported on F-1041. Furthermore, this applies not only to the year 2007, but also for that portion of 2006 starting the day after DOD to December 31, 2006. Trusts and estates both report their income on F-1041, the only real differences being the amount of the annual exemption for each, and the fact that an estate may elect a fiscal year for tax purposes, but a trust may not. If the estate in your case did not elect a fiscal year, it is now too late to do so, and a calendar year will be required for its F-1041s.

If the income for the entire year 2006 was reported on F-1040 filed for the deceased woman, the correct thing to do is to go back and "close the books" as of the DOD, dividing that year into two periods. The income from January 1st to the DOD was reportable on Schedule C of the woman's F-1040, but the income beginning the day after DOD to December 31st was reportable on F-1041. If this wasn't done, and it appears from your post that it was not, then an amended F-1040 for the year 2006 should be prepared and filed.