Does Your Tax Professional Know His Trust Tax Law?
Lets face it. It is hard to tell if a
"professional" knows his stuff. So, how
do you know if the guy that is about to prepare a trust or estate return for
you knows his stuff?
I have a good test. Here is the question:
"How are professional fees allocated towards income in preparation of a
beneficiaries K-1?"
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Answer |
How I Rate The Answer |
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I don't know. |
As fast as you can, make an excuse why you need to
leave this guy's office. Find someone else. |
|
Allocate this deduction to all classes of income. |
This is a correct answer, but it is not the correct
answer that you want to hear. Again, find an excuse to get out of the
office. Find someone else. |
|
Allocate this deduction first to....
Call Dave Kaufmann, CPA at
1-720-493-4804 to see what the right answer is. |
Bingo. This person knows his or her stuff.
Now ask one more critical question: |
Before we get to the next question, have the trust or
estate expert explain why this is the correct answer. The response
should be:
Allocate deductions to types of income that can be taxed
as high as 35% rather than types of income that have maximum tax rates of
15%.
Now ask the professional:
"What needs to be done to allocate the professional fees and other
deductions to taxable interest and nonqualified dividends?"
The correct answer is that the trustee must designate,
preferably in writing, that professional fees, and other deductions should
first be allocated to interest income that is fully taxable and to
nonqualified dividends.
Give bonus points if the tax professional mentions
treasury regulation §1.652(b)-3(b).
"What is the filing requirement for a US fiduciary income tax return
(Form 10401) for an estate?"
Over $600 of gross income. Example: If you sell $601 of
stock for no gain or loss, the gross income is over $600, and a fiduciary
income tax return, Form 1040, is required to be filed.
"What is the year - end for a US fiduciary income tax return
(Form 10401) for an estate?"
It depends on how the first US Fiduciary Income Tax
Return (Form 1041) is filed. The longest year - end that you can choose is
the month end that would not exceed a year from the date of of death.
Example: If the date of death is April 29, 2011, the latest year - end would
be March 31, 2012. Please note that the
IRS Notice "CP 575 B" that assigns
an employer ID number to the estate will always say that the Form 1041 is
due on April 15. That IRS notice is incorrect,
unless the date of death is in January! The year - end that is specified
on Form 1041 determines the year - end, not IRS Notice "CP 575 B."
Find out when estate income taxes are
due.
Extra Credit:
Ask your tax professional why it benefits the
beneficiaries to have the estate year - end that is not December 31.
Extra Credit:
Ask your tax professional why the above answer is correct
for estates, but incorrect for most trusts.
If you have questions about this, do not hesitate to contact us
at 720-493-4804. We serve clients all
over the country. A large portion of my business is preparing tax returns and
tax planning for trusts, estates and beneficiaries of trusts and estates.
Back to our Frequently Asked
Questions page for trusts.
US Estate Income Tax
Return
US Estate Income Tax Return Instructions
Colorado Estate Income Tax Return
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