Preparing and Filing Fiduciary Income Tax Returns for Trusts and Estates

When administering a trust or estate, fiduciaries often focus on asset management, beneficiary distributions, and honoring the decedent’s wishes. However, the preparation and filing of Fiduciary Income Tax Returns shouldn’t be overlooked.

Understanding when a return is required, what income must be reported, and which tax year applies can help trustees, personal representatives, and beneficiaries avoid costly mistakes and penalties.

For families engaged in estate planning in Ann Arbor, proactive tax compliance is an essential part of preserving wealth and ensuring a smooth administration process.

What Is a Fiduciary Income Tax Return?

A Fiduciary Income Tax Return is filed using IRS Form 1041 and reports income earned by a trust or estate during the administration period. This is separate from the decedent’s final individual income tax return (Form 1040) and applies only to income generated after death or within an ongoing trust.

Trusts and estates are treated as separate tax entities, which means they may have their own filing obligations depending on income levels.

Income Exemption Level and Filing Requirements

Trusts and estates were previously entitled to a $600 income exemption, which was increased to $2,000.00 starting with 2026 payment in the One Big Beautiful Bill and adjusted for inflation thereafter. However, a Fiduciary Income Tax Return is required to be filed if:

The trust or estate earns $600 or more of gross income or $2,000.00 starting in 2026 during the tax year; or
Any beneficiary is a nonresident alien, regardless of income amount.
All income remains taxable regardless of reporting requirements – businesses and contractors must still track and report earnings below these amounts

Once the $600/$2,000.00 threshold is met, the fiduciary must file Form 1041 and report all taxable income earned during the applicable tax period.

Choosing the Correct Tax Reporting Period

Unlike individual returns, trusts and estates are flexible in selecting the tax reporting period. You can choose either:

1. Calendar Year

Runs from January 1 through December 31
Filing deadline is typically April 15 of the following year
More commonly used for estates that do not file estate tax returns

2. Fiscal Year

Ends on the last day of the month before the decedent’s date of death
The return is due four and a half months after the close of the fiscal year
More commonly used for estates that file estate gift tax returns

Selecting a fiscal year can offer tax-planning advantages, including the ability to defer income recognition and align distributions more strategically with beneficiaries’ tax situations. This decision should be made carefully and often in coordination with legal and tax advisors experienced in estate planning in Ann Arbor.

Types of Income Reported on Fiduciary Income Tax Returns

The Fiduciary Income Tax Return must report all income earned by the trust or estate during the tax period including, but are not limited to, the following:

Interest Income

Interest earned from:

Bank accounts
Investment accounts
Notes or promissory loans
U.S. Treasury Savings Bonds

This income is typically reported on Form 1099-INT or Schedule K-1.

Dividend Income

Trusts and estates must report:

Ordinary dividends
Qualified dividends

Dividend income is generally reported on Form 1099-DIV and may be subject to different tax rates depending on classification.

Business Income or Loss

If the trust or estate operates a business or continues the decedent’s business activities, it must report:

Gross receipts
Operating expenses
Net profit or loss

This information is reported in a manner similar to Schedule C (Profit or Loss from Business) on an individual return.

Capital Gains or Losses

Capital gains or losses may arise from:

The sale of stocks or bonds
Liquidation of investment assets during administration

These transactions are commonly reported on Form 1099-B and must be accurately reflected on the Fiduciary Income Tax Return.

Ordinary Gains or Losses

Ordinary gains or losses can result from the sale of:

Business property
Real estate
Other non-capital assets

Proper classification is essential, as it affects how the income is taxed and whether it flows through to beneficiaries.

Other Income

Additional income sources that must be reported include:

Distributions from retirement accounts
IRA or annuity payouts

These amounts are typically shown on Form 1099-R and may have unique tax treatment depending on the circumstances.

Why Professional Guidance Matters

Fiduciary income taxation involves complex rules, tight deadlines, and coordination between estate administration and beneficiary tax reporting. Errors can lead to penalties, interest, and unnecessary disputes among beneficiaries.

For families and fiduciaries navigating trusts and estates, working with professionals experienced in estate planning in Ann Arbor can help ensure:

Proper tax year selection
Accurate income reporting
Strategic planning to minimize overall tax liability
Compliance with both federal and state requirements
Obtain date of death values to establish basis

Work With Trusted Estate Planning Counsel in Ann Arbor

Administering a trust or estate involves more than filing paperwork—it requires careful coordination between tax compliance, fiduciary duties, and long-term planning goals. Our attorneys have extensive experience guiding trustees, personal representatives, and families through every stage of trust and estate administration, including the preparation and filing of Fiduciary Income Tax Returns.

If you have questions about fiduciary tax obligations or want to ensure your trust or estate is handled correctly from the start, our team can help. Contact us to schedule a consultation and learn how our approach to estate planning in Ann Arbor can help protect assets, reduce tax exposure, and provide peace of mind for you and your family.

***This is not to be construed as tax advice. Attorneys are PSED Law do not practice tax law. Please see the advice of a CPA for professional advice.