Question

In its first tax year, the Vasquez Estate generated $50,000 of taxable interest income and $30,000 of tax-exempt interest income. It paid fiduciary fees of $8,000. The estate is subject to a 40% marginal estate tax rate and a 37% marginal income tax rate.
a. What is the "default" treatment of the payment of the fiduciary fees?
b. How should the executor assign the deductions for the payment of the fees?

Answer 1

Answer:

b)

i) Subtotal the income shown on lines 1 through 8 of Form 1041 and add the tax-exempt income from line 1 in “Other Information” on the back of the return to arrive at total income.

Total Income = Taxable income + Non-taxable income

= $50000 + $30000

= $80000

ii) Divide the total income by the total taxable income and multiply the results by the total fiduciary fees.

= ($80000/$50000)*8000

=$12800

iii) Take the deductible fees on line 12 and subtract the balance from the total tax-exempt income to arrive at the adjusted tax-exempt income.

= $30000 - ($12800-8000)

= $25200

Subtotal the income shown on lines 1 through 8 of Form 1041 and add the tax-exempt income from line 1 in “Other Information” on the back of the return to arrive at total income.

Divide the total income by the total taxable income and multiply the results by the total fiduciary fees.

Take the deductible fees on line 12 and subtract the balance from the total tax-exempt income to arrive at the adjusted tax-exempt income.

Place that number on Schedule B, line 2.

Explanation: