Best Tax Software For Estates And Trusts

tax software

If you had a loved one die in 2020, you may be faced with the need to file taxes for an estate or a trust. 

When a person dies, their assets belong to an estate. Any income generated from assets in that estate is income from the estate. If the estate generates more than $600 in income, the estate is responsible for paying income taxes.

This is what you need to know about taxes for estates and trusts. If you’re simply looking for the best tax software in general, check out our guide to the best tax software here.

Estate and Trust Tax Basics

If you had a parent or spouse who died during the last tax year, you’re likely required to file a tax return for that person. This person’s income that they received during their lifetime should be filed as a part of a regular tax return. You can use any major tax software program to handle the deceased person’s income in their lifetime. 

In addition to the person’s lifetime income, you may be required to file a return for their estate. Any income earned after the deceased person’s death is attributed to their estate. This could include posthumous rental income, royalties, or even income from business transactions. If an estate earns more than $600, it must file an IRS Form 1041.

The estate can deduct a variety of expenses and distributions including:

  • Income distributions to beneficiaries
  • Expert fees
  • Executor costs
  • Other necessary costs for the distribution of assets

If the estate distributes income to beneficiaries, they must generate Schedule K-1 forms for each of the beneficiaries. The beneficiaries then have to pay taxes on the income.

For example, an estate generates $5,000 in income from a rental property. It pays $500 for advice from a lawyer. It then passes the remaining $4,500 to five beneficiaries. The estate becomes responsible to generate five unique Schedule K-1 forms for each beneficiary.

While the estate is in probate, the estate needs to request an Employer Identification Number (EIN) to file Form 1041 correctly. It is easy to file for an EIN online. Once you have an EIN for the trust, you can file taxes (Form 1041) for the estate.

What Tax Software Can Be Used To File Taxes For An Estate Or Trust?

It is common for estates to hire a professional to file the fiduciary taxes for an estate. After all, generating K-1 forms and figuring out the rules for Form 1041 can be complex and time-consuming. However, those in charge of a relatively small estate may decide to file taxes on their own.

Nearly all estate tax programs are designed for tax professionals. This includes software like TaxSlayerPro, Drake Tax, ProConnect Tax Online (by Intuit), CrossLink, TaxWise. But each of these companies had prohibitively expensive price-points or they seemed inaccessible for novice users.

We could only find two software packages that allow you to file Form 1041 and issue the Schedule K-1 forms. H&R Block allows users to file Form 1041, but it doesn’t generate K-1 forms for beneficiaries.

TaxAct Estates and Trusts is more focused on estates and trusts than TurboTax business. However, estates that have many business deductions (such as expenses and depreciation from rental properties) may find TurboTax easier to use.

I Received A K-1 From An Estate. What Should I Do?

If you received a K-1 from an estate, you are responsible for paying tax on the income you received. The income counts as ordinary income, so the tax will be paid at your marginal tax rate.

Most major tax programs (except Credit Karma Tax) support income from K-1 forms. We especially like TaxHawk, H&R Block and TaxSlayer for people who need to file for multiple income schedules. 

These programs provide detailed guidance to help you transfer information from your tax form to the return. Typically, this is very easy to do in a tax program.

Consider Enlisting Professional Help

The person responsible for an estate doesn’t have to file taxes themselves. It may make more sense to work with a professional tax preparer to make sure that you don’t miss anything.

A tax pro can help ensure that everything is done correctly and deductions are maximized. If you want help from a professional, check out this guide on how to find a tax preparer near you.

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