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INCOME TAXATION OF ESTATES AND TRUSTS: PREPARATION OF FORM 1041 Steven G. Siegel February 19,2007 Table of Contents Page CHAPTER 1: GETTING STARTED..................................................................................1 I. Read and Understand the Operative Documents..............................................................1 II. Understand the Operative State Law...............................................................................2 CHAPTER 2: OVERVIEW OF SOME BASIC CONCEPTS AND ISSUES ....................3 I. Estates ......................................................................................................................3 II. Trusts ......................................................................................................................5 CHAPTER 3: INCOME REPORTABLE BY FIDUCIARIES .........................................11 A. Interest Income ­ Line 1, Form 1041................................................................11 B. Ordinary Dividend Income ­ Line 2a, Form 1041............................................11 C. Qualified Dividend Income ­ Line 2b, Form 1041...........................................11 D. Business Income ­ Line 3, Form 1041 .............................................................12 E. Capital Gains and Losses ­ Line 4, Form 1041.................................................13 F. Rents, Royalties, Partnerships, Income from Other Estates and Trusts ­ Line 5, Form 1041......................................................................................15 G. Farm Income ­ Line 6, Form 1041 ...................................................................16 H. Ordinary Gain or Loss (Form 4797) ­ Line 7, Form 1041 ...............................17 I. Other Income ­ Line 8, Form 1041 ....................................................................17 CHAPTER 4: DEDUCTIONS AVAILABLE TO FIDUCIARIES ..................................18 I. General Rules .................................................................................................................18 II. Specific Items of Deduction..........................................................................................20 A. Interest Expenses ­ Line 10, Form 1041...........................................................20 B. Taxes ­ Line 11, Form 1041 .............................................................................20 C. Fiduciary Fees ­ Line 12, Form 1041 ...............................................................21 D. Charitable Deductions ­ Line 13, Form 1041 (and Schedule A)......................22 E. Attorney, Accountant, Return Preparer Fees ­ Line 14, Form 1041.................24 F. Other Deductions Not Subject to 2% Floor ­ Line 15a, Form 1041 .................24 G. Allowable Miscellaneous Itemized Deductions Subject to 2% Floor ­ Line 15b, Form 1041..........................................................................................27 H. Income Distribution Deduction ­ Line 18, Form 1041 and Schedule B...........28 I. Estate Tax Deduction (Including IRD Items and Certain Generation-Skipping Taxes) ­ Line 19, Form 1041.....................................................................33 J. Exemptions ­ Line 20, Form 1041.....................................................................34 CHAPTER 5: TAX CALCULATIONS, CREDITS and PAYMENTS ............................35 A. How To Handle Taxable Income Realized by the Trust or Estate....................35

Page CHAPTER 6: DISTRIBUTIONS IN THE YEAR OF TERMINATION .........................43 CHAPTER 7: TRUSTS and ESTATES and the ALTERNATIVE MINIMUM TAX......45 A. General Rules....................................................................................................45 B. Calculation of AMT ..........................................................................................48 CHAPTER 8: SAMPLE PROBLEMS ­ HOW TO APPROACH FORM 1041 PREPARATION ...................................................................................................50 I. Gather Information .........................................................................................................50 II. Complete the General Information Sections .................................................................51 III. Go to the Income Lines................................................................................................51 IV. Go to the Deduction Lines...........................................................................................51 V. Complete the Regular Tax Liability ­ Then Any Other Applicable Taxes .................52 VI. Payment and Filing ......................................................................................................52 SAMPLE PROBLEM 1: ESTATE ­ ONGOING ADMINISTRATION..............54 SAMPLE PROBLEM 2: SIMPLE TRUST...........................................................59 SAMPLE PROBLEM 3: SIMPLE TRUST ­ CAPITAL GAINS PRESENT ......65 SAMPLE PROBLEM 4: COMPLEX TRUST ......................................................74 SAMPLE PROBLEM 5: ESTATE ­ FINAL YEAR ............................................81 SAMPLE PROBLEM 6: GRANTOR TRUST......................................................88 APPENDIX : INSTRUCTIONS FOR 1041

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