Comprehensive Example(p24)

The following is an example of a typical situation. All figures on the filled-in forms have been rounded to the nearest whole dollar.

On April 9, 2011, your father, John R. Smith, died at the age of 62. He had not resided in a community property state. His will named you to serve as his executor (personal representative). Except for specific bequests to your mother, Mary, of your parents' home and your father's automobile and a bequest of $5,000 to his church, your father's will named your mother and his brother as beneficiaries.

After the court has approved your appointment as the executor, you should obtain an employer identification number for the estate. (See Duties under Personal Representatives, earlier.) Next, you use Form 56 to notify the Internal Revenue Service that you have been appointed executor of your father's estate.

Your father had the following assets when he died.

• His checking account balance was $2,550 and his savings account balance was $53,650.
• Your father inherited his home from his parents on March 5, 1980. At that time it was worth $42,000, but was appraised at the time of your father's death at $150,000. The home was free of existing debts (or mortgages) at the time of his death.
• Your father owned 500 shares of ABC Company stock that cost $10.20 a share in 1984. The stock had a mean selling price (midpoint between highest and lowest selling price) of $25 a share on the day he died. He also owned 500 shares of XYZ Company stock that cost $30 a share in 1989. The stock had a mean selling price on the date of death of $22.
• The appraiser valued your father's automobile at $6,300 and the household effects at $18,500.
• Your father owned a coin collection. The coins collection was appraised at $2,800.
• Your father's employer sent a check to your mother for $11,082 ($12,000 − $918 for social security and Medicare taxes), representing unpaid salary and payment for accrued vacation time. The statement that came with the check indicated that no amount was withheld for income tax. The check was made out to the estate, so your mother gave you the check.
• The Easy Life Insurance Company gave your mother a check for $275,000 because she was the beneficiary of his life insurance policy.
• Your father was the owner of several series EE U.S. savings bonds on which he named your mother as co-owner. Your father purchased the bonds during the past several years. The cost of these bonds totaled $2,500. After referring to the appropriate table of redemption values (see U.S. savings bonds acquired from decedent, earlier), you determine that interest of $840 had accrued on the bonds at the date of your father's death. You must include the redemption value of these bonds at date of death, $3,340, in your father's gross estate.
• On July 1, 1996, your parents purchased a house for $90,000. They have held the property for rental purposes continuously since its purchase. Your mother paid one-third of the purchase price, or $30,000, and your father paid $60,000. They owned the property, however, as joint tenants with right of survivorship. An appraiser valued the property at $120,000. You include $60,000, one-half the value, in your father's gross estate because your parents owned the property as joint tenants with right of survivorship and they were the only joint tenants.

Your mother also gave you a Form W-2, Wage and Tax Statement, that your father's employer had sent. In examining it, you discover that your father had been paid $11,000 in salary between January 1, 2011, and April 9, 2011 (the date he died). The Form W-2 showed $11,000 in box 1 and $23,000 ($11,000 + $12,000) in boxes 3 and 5. The Form W-2 indicated $845 as federal income tax withheld in box 2. The estate received a Form 1099-MISC from the employer showing $12,000 in box 3. The estate received a Form 1099-INT for your father showing he was paid $1,900 interest on his savings account at the First S&L of Juneville in 2011, before he died.

From the papers in your father's files, you determine that the $11,000 paid to him by his employer (as shown on the Form W-2), rental income, and interest are the only items of income he received between January 1 and the date of his death. You will have to file an income tax return for him for the period during which he lived. (You determine that he timely filed his 2010 income tax return before he died.) The final return is not due until April 17, 2012, the same date it would have been due had your father lived during all of 2011.

The check representing unpaid salary and earned but unused vacation time was not paid to your father before he died, so the $12,000 is not reported as income on his final return. It is reported on the income tax return for the estate (Form 1041) for 2011. The only taxable income to be reported for your father will be the $11,000 salary (as shown on the Form W-2), the $1,900 interest, and his portion of the rental income that he received in 2011.

Your father was a cash basis taxpayer and did not report the interest accrued on the series EE U.S. savings bonds on prior tax returns that he filed jointly with your mother. As the personal representative of your father's estate, you choose to report the interest earned on these bonds before your father's death ($840) on the final income tax return.

The rental property was leased the entire year of 2011 for $1,000 per month. Under local law, your parents (as joint tenants) each had a half interest in the income from the property. Your father's will, however, stipulates that the entire rental income is to be paid directly to your mother. None of the rental income will be reported on the income tax return for the estate. Instead, your mother will report all the rental income and expenses on Form 1040. Checking the records and prior tax returns of your parents, you find that they previously elected to use the alternative depreciation system (ADS) with the mid-month convention. Under ADS, the rental house is depreciated using the straight-line method over a 40-year recovery period. They allocated $15,000 of the cost to the land (which is never depreciable) and $75,000 to the rental house. Salvage value was disregarded for the depreciation computation. Before 2011, $23,359 had been allowed as depreciation. (For information on ADS, see Publication 946.)

During the year, you received a bill from the hospital for $615 and bills from your father's doctors totaling $475. You paid these bills as they were presented. In addition, you find other bills from his doctors totaling $185 that your father paid in 2011 and receipts for prescribed drugs he purchased totaling $536. The funeral home presented you a bill for $6,890 for the expenses of your father's funeral, which you paid.

The medical expenses you paid from the estate's funds ($615 and $475) were for your father's care and were paid within 1 year after his death. They will not be used to figure the taxable estate so you can treat them as having been paid by your father when he received the medical services. See Medical Expenses under Final Income Tax Return for Decedent—Form 1041, earlier. However, you cannot deduct the funeral expenses either on your father's final return or on the estate's income tax return. They are deductible only on the federal estate tax return (Form 706).

In addition, after going over other receipts and canceled checks for the tax year with your mother, you determine that the following items are deductible on your parents' 2011 income tax return.

Health insurance	$4,250
State income tax paid	891
Real estate tax on home	2,600
Contributions to church	3,830

Rental expenses included real estate taxes of $700 and mortgage interest of $410. In addition, insurance premiums of $260 and painting and repair expenses for $350 were paid. These rental expenses totaled $1,720 and are reflected on Schedule E (Form 1040).

Your mother and father owned the property as joint tenants with right of survivorship and they were the only joint tenants, so her basis in this property upon your father's death is $93,047. This is figured by adding the $60,000 value of the half interest included in your father's gross estate to your mother's $45,000 share of the cost basis and subtracting your mother's $11,953 share of depreciation (including 2011 depreciation for the period before your father's death), as explained next.

For 2011, you must make the following computations to figure the depreciation deduction.

1. For the period before your father's death, depreciate the property using the same method, basis, and life used by your parents in previous years. They used the mid-month convention, so the amount deductible for three and a half months is $547. (This brings the total depreciation to $23,906 ($23,359 + $547) at the time of your father's death.)
2. For the period after your father's death, you must make two computations.
   1. Your mother's cost basis ($45,000) minus one-half of the amount allocated to the land ($7,500) is her depreciable basis ($37,500) for half of the property. She continues to use the same life and depreciation method as was originally used for the property. The amount deductible for the remaining eight and a half months is $664.
   2. The other half of the property must be depreciated using a depreciation method that is acceptable for property placed in service in 2011. You chose to use ADS with the mid-month convention. The value included in the estate ($60,000) less the value allocable to the land ($10,000) is the depreciable basis ($50,000) for this half of the property. The amount deductible for this half of the property is $886 ($50,000 × .01771). See chapter 4 and Table A-13 in Publication 946.

Show the total of the amounts in (1) and (2)(a), above, on line 17 of Form 4562, Depreciation and Amortization. Show the amount in (2)(b) on line 20c. The total depreciation deduction allowed for the year is $2,097.

After December 31, 2011, when your mother determines the amount of her income, you and your mother must decide whether you will file a joint return or separate returns for your parents for 2011. Your mother has rental income and $400 of interest income from her savings account at the Mayflower Bank of Juneville, so it appears to be to her advantage to file a joint return.

The illustrations of Form 1040 and related schedules appear near the end of this publication. These illustrations are based on information in this example. The tax refund is $1,194. The computation is as follows:

Income:
Salary (per Form W-2)	$11,000
Interest income	3,140
Net rental income	8,183
Adjusted gross income		$22,323
Minus: Itemized deductions		11,708
Balance		$10,615
Minus: Exemptions (2)		7,300
Taxable income		$3,315
Income tax from tax table		$333
Minus: Tax withheld	$845
Sch. M credits	682
Total payments		$1,527
Refund of taxes		$1,194

The illustrations of Form 1041 and the related schedules for 2011 appear near the end of this publication. These illustrations are based on the information that follows.

Having determined the tax liability for your father's final return, you now figure the estate's taxable income. You decide to use the calendar year and the cash method of accounting to report the estate's income. This return also is due by April 17, 2012.

In addition to the amount you received from your father's employer for unpaid salary and for vacation pay ($12,000) entered on line 8 (Form 1041), you received a dividend check from the XYZ Company on June 16, 2011. The check was for $750 and you enter it on line 2a (Form 1041). The amount is a qualified dividend and you show the allocation to the beneficiaries and the estate on line 2b. The amount allocated to the beneficiary ($121) is based on the distributable dividend income before any deductions. The estate received a Form 1099-INT showing $2,250 interest paid by the bank on the savings account in 2011 after your father died. Show this amount on line 1 (Form 1041).

In September, a local coin collector offered you $3,000 for your father's coin collection. Your mother was not interested in keeping the collection, so you accepted the offer and sold him the collection on September 23, 2011.

You will have to report the sale on Schedule D (Form 1041) when you file the income tax return of the estate. The estate has a capital gain of $200 from the sale of the coins. The gain is the excess of the sale price, $3,000, over the value of the collection at the date of your father's death, $2,800. See Gain (or loss) from sale of property under Income Tax Return of an Estate—Form 1041 and its discussion, Income To Include, earlier.

In November 2011, you received a bill for the real estate taxes on your parents' home. The bill was for $2,250, which you paid. Include real estate taxes on line 11 (Form 1041).

You paid $325 for attorney's fees in connection with administration of the estate. This is an expense of administration and is deducted on line 14 (Form 1041). You must, however, file with the return a statement in duplicate that such expense has not been claimed as a deduction from the gross estate for figuring the federal estate tax on Form 706, and that all rights to claim that deduction on Form 706 are waived.

You made a distribution of $2,000 to your father's brother, James. The distribution was made from current income of the estate under the terms of the will.

The income distribution deduction ($2,000) is figured on Schedule B of Form 1041 and deducted on line 18 (Form 1041).

You characterized the $2,000 that is included in income and reported it on Schedule K-1 (Form 1041) as follows:

Type of Income	Amount	Deductions	Distributable Net Income
Interest (15%)	$ 2,250	(386)	$ 1,864
Dividends (5%)	750	(129)	621
Other Income (80%)	12,000	(2,060)	9,940
Total	$15,000	(2,575)	$12,425

Line 1 – Interest
$2,000 × (1,864 ÷ 12,425)	$300
Line 2b – Total dividends
$2,000 × (621 ÷ 12,425)	100
Line 5 – Other income
$2,000 × (9,940 ÷12,425)	1,600
Total Distribution	$2,000

The estate took an income distribution deduction, so you must prepare Schedule I (Form 1041), Alternative Minimum Tax, regardless of whether the estate is liable for the alternative minimum tax.

The other distribution you made out of the assets of the estate in 2011 was the transfer of the automobile to your mother on July 1. This is included in the bequest of property, so it is not taken into account in computing the distributions of income to the beneficiary. The life insurance proceeds of $275,000 paid directly to your mother by the insurance company are not an asset of the estate.

The taxable income of the estate for 2011 is $10,025, figured as follows:

Gross income:
Income in respect of a decedent		$12,000
Dividends		750
Interest		2,250
Capital gain		200
		$15,200
Minus: Deductions and income distribution
Real estate taxes	$2,250
Attorney's fee	325
Exemption	600
Distribution	2,000	5,175
Taxable income		$10,025

The estate had a net capital gain, which includes 28% rate gain, and taxable income, so you use the Schedule D Tax Worksheet to figure the tax, $2,384, for 2011.

For purpose of this example, we have illustrated the filled-in worksheet. You would not file the worksheet with the return. You would keep the worksheet for your records.

On January 6, 2012, you receive a dividend check from the XYZ Company for $500. You also have interest posted to the savings account in January totaling $350. On January 27, 2012, you make a final accounting to the court and obtain permission to close the estate. In the accounting, you list $1,650 as the balance of the expense of administering the estate.

You advise the court that you plan to pay $5,000 to Hometown Church under the provisions of the will, and that you will distribute the balance of the property to your mother, the remaining beneficiary.

After making the distributions already described, you can wind up the affairs of the estate. The gross income of the estate for 2012 is more than $600, so you must file a final income tax return, Form 1041, for 2012 (not shown). The estate's gross income for 2012 is $850 (dividends $500 and interest $350).

After making the following computations, you determine that none of the distributions made to your mother must be included in her taxable income for 2012.

Gross income for 2012:
Dividends	$500
Interest	350
	$850
Less deductions:
Administration expense	$1,650
Loss	($800)

Note that because the contribution of $5,000 to Hometown Church was not required under the terms of the will to be paid out of the gross income of the estate, it is not deductible and was not included in the computation.

The estate had no distributable net income in 2012, so none of the distributions made to your mother have to be included in her gross income. Furthermore, because the estate in the year of termination had deductions in excess of its gross income, the excess of $800 will be allowed as a miscellaneous itemized deduction subject to the 2%-of-adjusted-gross-income limit to your mother on her individual return for the year 2012, if she itemizes deductions.

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Schedule D Tax Worksheet Complete this worksheet only if: On Schedule D, line 14b, column (2), or line 14c, column (2), is more than zero, or Both line 2b(1) of Form 1041 and line 4g of Form 4952 are more than zero. Exception: Do not use this worksheet to figure the estate's or trust's tax if line 14a, column (2), or line 15, column (2), of Schedule D or Form 1041, line 22 is zero or less; instead, see the instructions for Schedule G, line 1a of Form 1041.   1. Enter the estate's or trust's taxable income from Form 1041, line 22 1. 10,025   2. Enter qualified dividends, if any, from Form 1041, line 2b(2) 2. 629                 3. Enter the amount from Form 4952, line 4g 3.                       4. Enter the amount from Form 4952, line 4e* 4.         5. Subtract line 4 from line 3. If zero or less, enter -0- 5. -0-                 6. Subtract line 5 from line 2. If zero or less, enter -0- 6. 629             7. Enter the smaller of line 14a, col. (2) or line 15, col. (2) from Sch. D 7. 200                 8. Enter the smaller of line 3 or line 4 8. -0-                 9. Subtract line 8 from line 7. If zero or less, enter -0- 9. 200           10. Add lines 6 and 9 10. 829       11. Add lines 14b, column (2) and 14c, column (2) from Schedule D 11. 200             12. Enter the smaller of line 9 or line 11 12. 200       13. Subtract line 12 from line 10. 13. 629   14. Subtract line 13 from line 1. If zero or less, enter -0-. 14. 9,396   15. Enter the smaller of line 1 or $2,300 15. 2,300             16. Enter the smaller of line 14 or line 15 16. 2,300             17. Subtract line 10 from line 1. If zero or less, enter -0- 17. 9,196                 18. Enter the larger of line 16 or line 17   18. 9,196         If lines 15 and 16 are the same, skip line 19 and go to line 20. Otherwise, go to line 19.       19. Subtract line 16 from line 15   19.         If lines 1 and 15 are the same, skip lines 20 through 32 and go to line 33. Otherwise, go to line 20.       20. Enter the smaller of line 1 or line 13           20. 629   21. Enter the amount from line 19 (if line 19 is blank, enter -0-)           21. -0-   22. Subtract line 21 from line 20. If zero or less, enter -0-   22. 629       23. Multiply line 22 by 15% (.15) 23. 94     If Schedule D, line 14b, column (2) is zero or blank, skip lines 24 through 29 and go to line 30. Otherwise, go to line 24.       24. Enter the smaller of line 9 (above) or line 14b, col. (2) (from Schedule D) 24.             25. Add lines 10 and 18 25.                   26. Enter the amount from line 1 above 26.                   27. Subtract line 26 from line 25. If zero or less, enter -0- 27.             28. Subtract line 27 from line 24. If zero or less, enter -0-   28.       29. Multiply line 28 by 25% (.25) 29.     If Schedule D, line 14c, column (2) is zero or blank, skip lines 30 through 32 and go to line 33. Otherwise, go to line 30.         30. Add lines 18, 19, 22, and 28 30. 9,825       31. Subtract line 30 from line 1 31. 200       32. Multiply line 31 by 28% (.28) 32. 56   33. Figure the tax on the amount on line 18. Use the 2011 Tax Rate Schedule in the Instructions for Form 1041 33. 2,226   34. Add lines 23, 29, 32, and 33 34. 2,376   35. Figure the tax on the amount on line 1. Use the 2011 Tax Rate Schedule in the Instructions for Form 1041 35. 2,500   36. Tax on all taxable income (including capital gains and qualified dividends). Enter the smaller of line 34 or line 35 here and on line 1a of Sch. G, Form 1041 36. 2,376   *If applicable, enter instead the smaller amount entered on the dotted line next to line 4e of Form 4952.

Form No.		Title		Due Date**
SS-4		Application for Employer Identification Number		As soon as possible. The identification number must be included in returns, statements, and other documents.
56		Notice Concerning Fiduciary Relationship		As soon as all necessary information is available.*
706		United States Estate (and Generation-Skipping Transfer) Tax Return		9 months after date of decedent's death.
706-A		United States Additional Estate Tax Return		6 months after cessation or disposition of special-use valuation property.
706-GS(D)		Generation-Skipping Transfer Tax Return for Distributions		Generally, April 15th of the year after the distribution.
706-GS(D-1)		Notification of Distribution From a Generation-Skipping Trust		Generally, April 15th of the year after the distribution.
706-GS(T)		Generation-Skipping Transfer Tax Return for Terminations		Generally, April 15th of the year after the taxable termination.
706-NA		United States Estate (and Generation-Skipping Transfer) Tax Return, Estate of nonresident not a citizen of the United States		9 months after date of decedent's death.
709		United State Gift (and Generation-Skipping Transfer) Tax Return		April 15th of the year after the gift was made.
712		Life Insurance Statement		Part I to be filed with estate tax return.
1040		U.S. Individual Income Tax Return		Generally, April 15th of the year after death.**
1040NR		U.S. Nonresident Alien Income Tax Return		See form instructions.
1041		U.S. Income Tax Return for Estates and Trusts		15th day of 4th month after end of estate's tax year.**
1041-T		Allocation of Estimated Tax Payments to Beneficiaries		65th day after end of estate's tax year.
1041-ES		Estimated Income Tax for Estates and Trusts		Generally, April 15th, June 15th, Sept. 15th, and Jan. 15th for calendar-year filers.**
1042		Annual Withholding Tax Return for U.S. Source Income of Foreign Persons		March 15th.**
1042-S		Foreign Person's U.S. Source Income Subject to Withholding		March 15th.**
4768		Application for Extension of Time To File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes		See form instructions.
4810		Request for Prompt Assessment Under Internal Revenue Code Section 6501(d)		As soon as possible after filing Form 1040 or Form 1041.
4868		Application for Automatic Extension of Time To File U.S. Individual Income Tax Return		April 15th.**
5495		Request for Discharge From Personal Liability Under Internal Revenue Code Section 2204 or 6905		See form instructions.
7004		Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns		15th day of 4th month after end of estate's tax year.**
8300		Report of Cash Payments Over $10,000 Received in a Trade or Business		15th day after the date of the transaction.
8822		Change of Address		As soon as the address is changed.
* A personal representative must report the termination of the estate, in writing, to the Internal Revenue Service. Form 56 can be used for this purpose. ** If the due date falls on a Saturday, Sunday, or legal holiday, file on the next business day.

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Table B. Worksheet To Reconcile Amounts Reported in Name of Decedent on Information Returns (Forms W-2, 1099-INT, 1099-DIV, etc.) Name of Decedent   Date of Death Decedent's Social Security Number Name of Personal Representative, Executor, or Administrator   Estate's Employer Identification Number (If Any) Source (list each payer) A Enter total amount shown on information return B Enter part of amount in column A reportable on decedent's final return C Amount reportable on estate's or beneficiary's income tax return (column A minus column B) D Part of column C that is income in respect of a decedent 1. Wages                             2. Interest income                                       3. Dividends                                                 4. State income tax refund         5. Capital gains         6. Pension income                             7. Rents, royalties                             8. Taxes withheld*                             9. Other items, such as social security, business and farm income or loss, unemployment compensation, etc.                                                 * List each withholding agent (employer, etc.)