When managing an estate, one of the initial decisions to consider is whether to file the estate’s income tax return on a fiscal year or calendar year basis. This choice carries practical implications for tax planning and compliance. Below, Cheri Queener, CPA, Senior Estate and Trust Manager, outlines the availability of each filing option, the necessary steps for submission, and the pros and cons of each approach.
Understanding Fiscal and Calendar Years
By default, estates can file their income tax return (Form 1041) using either a calendar year or a fiscal year. A calendar year aligns with the standard January 1 to December 31 timeline, while a fiscal year allows the estate to select a 12-month period ending on the last day of any month. This flexibility is exclusive to estates, as trusts generally must adhere to the calendar year unless certain exceptions apply. For estates electing a fiscal year, the first fiscal year begins on the day after the decedent’s death and ends on the last day of the chosen month in the following year, not to exceed 12 months. For example, if an individual passes away on June 15 and the executor selects a fiscal year ending May 31, the first fiscal year would run from June 16 of the current year to May 31 of the following year.
Tax Return Deadlines and Filing Steps
Understanding the due dates is crucial for maintaining compliance. The due date for an estate income tax return depends upon whether the estate follows a fiscal or calendar year. For fiscal year filers, the deadline falls on the 15th day of the fourth month after the fiscal year’s end. Using the previous example, an estate with a fiscal year ending May 31 must submit its tax return by September 15. Calendar year filers, however, have until April 15 of the following year to file Form 1041.
Executors will first need to obtain an Employer Identification Number (EIN), which is required for filing Form 1041, the U.S. Income Tax Return for Estates and Trusts. They must then decide whether to use a fiscal or calendar year, based on the estate’s circumstances, and complete Form 1041 to report the estate’s income, deductions, and credits. If a revocable trust is involved, executors should also consider a section 645 election. This election allows estates to treat the trust as part of the estate for tax purposes, enabling the trust to file using the estate’s fiscal year. Once all documentation is prepared, executors will submit Form 1041 and any payment due by the applicable deadline. Partnering with an estate and trust planning advisor can streamline this process, ensuring all requirements are met efficiently.
Advantages and Disadvantages of Fiscal Year Filing
Choosing a fiscal year offers several advantages, including the ability to defer income received near the end of the calendar year to the following tax year, which provides additional time to manage distributions and tax payments. A fiscal year may also better align with the estate’s cash flow or asset liquidations, simplifying financial management. Additionally, income distributions can be timed to minimize tax burdens for beneficiaries. However, overlapping deadlines can complicate fiscal year accounting, especially if beneficiaries or advisors are accustomed to calendar year reporting. Consulting with an estate and trust planning advisor can help determine whether the benefits of a fiscal year outweigh the administrative complexities.
Helping You Get There…
Electing between a fiscal year or a calendar year for an estate’s income tax return has lasting implications. Factors such as the timing of income, the needs of beneficiaries, and the administrative burden should all be carefully considered. An estate and trust planning advisor can provide invaluable guidance, assisting executors in making informed decisions that align with their fiduciary responsibilities and the needs of the estate. If you’re navigating the complexities of estate and trust income tax filings, connect with Boulay’s Estate and Trust Planning team to find out how we’re helping you get there.