1041 Estate tax questions

[Kea]

I don't do very many 1041s and this is my first multi-year estate.

Client passed away in October 2011. Income was from interest, dividends (mutual funds), rental of farm land & capital gains (fund sales & intallment sale). Deductions were mortgage interest & real estate tax.

When moving the 2011 return from old software (TaxWorks) to new (TaxWise), I found that I had entered the % wrong on an istallment sale (decimal error of 0.74% vs 74%). This caused the capital gain to be higher than previously reported ($2466 vs 1540). But in both cases there is no tax. Taxable and total income increased, but since the capital gain got subtracted on page 2, the actual tax was $0 with and without the error.

Question 1 - Is there any reason to amend 2011? Nothing was distributed in 2011 so no impact on K1s. No capital loss, so no carry-forward issues.

In 2012, the estate sold the house and a few mutual funds were sold (took a while to get brokerage to stop doing automated buys and sells). Executor closed account and funds were transferred to beneficiaries. This resulted in an $8000 capital loss. Like on a 1040, $3000 is used against income and the rest is carried forward. AGI is negative.

Question 2 - Since the estate is still open, the loss can't be passed through to the beneficiaries yet?

Question 3 - Executor has told me that the proceeds of the house sale were distributed to the beneficiaries. If I understand correctly (and that's a big "if" right now), distibutions of assets & proceeds are not reported. But distibutions of taxable income & losses are?

Question 4 - What other questions do I need to ask about any distributions?

I think I have this about wrapped up. I'm just unsure on what changes since the estate is still open. They may keep it open for several years due to the farm land rental.

Thanks

[Terry D EA]

Question 1, I am unsure of how I would handle this. There is a responsibility to file an accurate tax return. If you're willing to do an amendment at no cost as you discovered it was your error, then do so.

Question 2, I don't think it matters if the estate is open or closed when it comes to the gain/loss resulting from the completion of the estate tax return. The 1041usually has a K-1 attached for the beneficiaries so it is my opinion the loss should be reported on their individual income taxes for the year.

Question 3, This one is a little sticky, who owned the house at the time of sale? If it was owned by the estate, then the proceeds should have passed through the estate and not directly distributed. If the beneies received the house as an inheritance, then process taken was okay.

Question 4, after all assets, funds;' etc have been distributed according to the will, and the only thing remaining is income to the estate, then each year an estate tax return will have to be completed to show the income and K-1's to the beneies.

[Kea]

Thanks Terry.

Q1 I have no problem doing the amended return and it would, of course, be free. At least with 1040s, I've had one or two clients who didn't want to file an amendment that wasn't required.

Q3 The house & all other assets were willed to client's 4 adult children. House was sold within about 5 -6 months and was still held by estate. Closing documents & 1099S showed Estate name & EIN. Check was issued to the estate. Executor wrote check to siblings (and himself) for their portions.

Q4 I was just trying to figure out what details I need for asking questions about distributions. Do I just need total amounts? Or, do I need specifics about the source of each distribution? (i.e. sale of house vs bank interest)

[Terry D EA]

It looks like you have it all in line. It appears smart decsions were made regarding the sale of the home. If it was sold at FMV or less then the beneies come out okay with no taxable gain. I've seen this numerous times where there was a lack of planning and the beneies had to pay tax. Even had one client get really upset with me a few years ago when I told her that the proceeds were to be split between her and her sisters evenly and that each would most likely have to pay tax on the proceeds because the home was given to them 5 to 10 years before their mother passed which meant mom's basis was their basis.

Q4- I personally like the details and itemize them on a statement attached to the return. That way it covers any questions.

[Kea]

I've always considered myself an analyst with emphasis on the 1st 2 syllables.

I feel like I'm in over my head with this multi-year estate. I'm not sure exactly how the distributions affect a current 1041. The only 1041s I've done just showed the distributions of everything that happened that year & everything got closed out. I'm encouraged that you think I have this all in line. I guess that means I'm close. I just need to be able to "visualize" what's going on with the distributions.

They sold the house quickly so the loss is just the cost of sale. I would like to pass the loss to the benes, but from what I'm reading, losses carry forward until estate is closed. Gains can be passed through, but not losses.

[Kea]

Cash from savings / money market accounts and the proceeds from the house were distributed. One bene got the car and received less cash (FMV of car). No "income" was distributed.

I think that means I don't have to report any distributions. Is that correct?