The individual income tax and the estate tax have an obscure, complicated sibling: the estate and trust income tax.
Ordinary people paid $2.7 trillion in income taxes in 2024, or about 53% of all of the taxes the U.S. federal government received that year, according to the latest Internal Revenue Service Data Book.
Very large estates paid $33 billion in federal estate taxes, or 0.6% of 2024 federal tax revenue.
That same year, estates and trusts used Form 1041 to send the IRS $59 billion, or 1.2% of 2024 federal tax revenue.
What it means: A tax that few clients have heard of cost taxpayers twice as much last year as the dreaded estate tax.
Estate and trust income tax basics: The income tax rules for estates and trusts are tougher than the income tax rules for individuals.
Fidelity Wealth Management warns that Form 1041 filers that earn as little as $15,650 this year may pay a 37% tax on income over that level.
The list of Form 1041 filers includes the estates of recently deceased individuals, bankruptcy estates and pooled income funds.
The kinds of trusts that use the form are simple trusts, complex trusts, disability trusts that qualify for special federal tax treatment, grantor-type trusts and trusts that hold S corporation stock.
Some other types of trusts, such as charitable trusts or charitable remainder trusts, may have to file other forms but may not need to file Form 1041, especially if they have little income.
The estate and trust income tax rules may affect how much life insurance clients will need to meet tax or other obligations and where assets such as stocks, bonds, businesses, life insurance policies and annuities should go.
Form 1041 filing volume: The IRS receives about two Form 1041 filings for every 100 individual income tax returns.
At the state level, the number of estate and trust tax return filings as a percentage of 2024 individual income tax filings ranged from 0.9%, in Mississippi, up to 8.3%, in Delaware, where corporate bankruptcy estates and other business-related trusts pumped up the totals.
Estate and trust income tax amounts: Form 1041 filers paid an average of $18,582 in estate and trust income taxes per return in 2024, up from an average of $9,174 per Form 1041 return in 2014.
But, in some cases, the obligations related to estate and trust taxes can be much higher: A tax court judge wrote in a January 2024 memorandum opinion about a case involving IRS assertions that a trust owed it $5.4 million more than the trust had originally calculated on its Form 1041.
For a look at the 12 states with the highest average estate and trust tax payments tied to Form 1041 returns — and a possible need for extra attention to managing estate and trust tax obligations — see the gallery accompanying this article.
Credit: Adobe
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