1041 returns CPA in Phoenix Arizona trust estate 1 of 4 common mistakes to avoid!

By Jeffrey Brooks, CPA, CFP, MBA for Jbrooks Wealth Advisors, PC, a Professional CPA and CFP Firm jeff@jbrookswa.com  602-292-2009  Please consult with your professional tax CPA regarding your specific circumstances! Unfortunately we cannot give free advice because this would be unfair to our clients!

I have been preparing 1041 trust and estate tax returns for almost 40 years.  The complexity of these tax returns is much more  than preparing business and personal tax returns. 

Here is the first of  4 common mistakes that I would like to share with you.

Why?  Because it has been very painful to have to tell new  client who needs for us to prepare the 1041 estate and trust  that they are going to be penalized for not being aware of strict 1041 tax rules.


Failure to distribute in excess of income earned for tax year results in wasting money by paying more taxes that required!

One frequent example is where the is an annuity from an insurance company or an  IRA received in the estate’s or trust’s name and  federal identification number.  These amounts can be quite large because they have been accumulated over many years!

Unfortunately there is either  No or just 10% or 20%  federal tax  withheld.

Here is an actual situation that occurred recently:

I will call this client  Mary Jones who was the Executor of the of the estate and the trustee of the living trust.  Mary’s father John Jones (Dad)  passed away on 11-01-16.  Mary contacted her dad’s attorney who referred Mary to another attorney.

Mary met with the attorney and the attorney applied for two federal identification numbers. One for the trust for those assets that had been titled in the Revocable Living Trust and one for the Estate for those assets that had not been titled in dad’s Revocable Living Trust. 

IRS issued the federal identification numbers by December 31, 2016

However several days before 12-31-17 Mary received checks for $850,000 for  an annuity and IRA owned by  Dad.  They  were titled in dad’s revocable living trust. 

Mary and her brother were at odds with each other and did not talk even during the  funeral.   Mary’s dad had made her executor and trustee and she was afraid to make any mistakes so she didn’t distributer any money to her herself or her  brother the two beneficiaries.


On February 4, 2018 Mary received a 1099 DIV and 1099 B from a mutual fund that Dad owned. Taxable income was about $40,000.

Within a week  Mary received the annuity and IRA tax statements 1099Rs reflecting distribution of $850,000 in taxable income in the trust’s name: John J. Jones Revocable Living Trust but Dad’s Social Security Number.

Mary became very concerned and hired a local CPA who unfortunately did not have experience preparing 1041 estate returns.  The CPA did not carefully read the living trust document and the will. Mary gave the CPA the two IRS documents with the federal identification numbers. The CPA promised to “jump right on it”.

However, the CPA was busy with tax season and did not get back to Mary.

Mary contacted the CPA on 4-2-2018 and was told that an extension was sent to IRS.

Mary thought everything was good. Unfortunately she was wrong!

The CPA called Mary in June 2018 and said she was having health issues and could not prepare the returns but that she had plenty of time because the CPA had prepared an extension.

Mary contacted me on Monday August 20th.  I was leaving for tax seminars on Tuesday August 21st.  I had a new opening at 2 PM and Mary came to my office and brought many of documents I requested including the John J. Jones Revocable Living Trust, IRS letters, 2016 personal tax returns.

Because  minimal  funds were distributed out of the trust and estate…..the estate and trust were taxed at the VERY HIGH TRUST RATES.

Personal income  tax year 2017, the tax brackets were at 15%, 25%, 28%, 33%, and 39.6% which is the same as last year.  However,  TRUST AND ESTATE INCOME TAX RATES WERE MUCH HIGHER!!

A. taxable income from  $9,150 to $12,500   results in 33% tax bracket***!!! 

B. taxable income from $12,501 results in 39.6% tax bracket!!!

C. Arizona tax rate average about 4.4% so average rate was around 44%*

So, it looked like Mary was in a “pickle” since neither Mary or her brother had taken a large enough distribution.  However, there is SOME good news. 

Mary as executor and trustee in December 2017 gifted $100,000  for Christmas  some relatives of Mary and her brother.  This act of  kindness resulted in reducing the estate and trust tax by $44,000*!

However, if the CPA had told Mary about the 65 day rule then Mary could have reduced the total taxes paid significantly!!! 

How could huge mistake have been avoided? The 65 day rule!

What is the 65 day rule allowed under Section 663(b) election:  This election will allow the trustee or executor to make a distribution of trust or estate income as late as 65 days after the close of the trust or estate tax year and to treat the distribution as having been made during the trust or estate tax year.  So if Mary had been told about the 65 day rule….she could have distributed all the income from 2017 by say March 3, 2018 resulting in the income being taxed to Mary and her brother instead of to the estate and trust resulting in keeping more of the cash instead of giving too much to the government!

NOTE: We normally only accept new clients that are referred by a current client or have used a CPA for the past 2 tax years.  The one exception is for new clients who need to get their 1041 tax returns prepared.  Our minimum fee is $1000 for 1041 returns.

602-292-2009 cell phone

***Tax Rates:


15% Bracket
Taxable income not over $2,550 results in a tax of 15% of the taxable income

25% Bracket
Taxable income over $2,550, but not over $6,000 results in a tax of $382.50 plus 25% of the excess over $2,550.

28% Bracket
Taxable income over $6,000, but not over $9,150 results in a tax of $1,245.00 plus 28% of the excess over $6,000.

33% Bracket
Taxable income over $9,150, but not over $12,500 results in a tax of $2,127.00 plus 33% of the excess over $9,150.

39.6% Bracket
Taxable income over $12,500 results in a tax of $3,232.50 plus 39.6% of the excess over $12,500.


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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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JBrooks Wealth Advisors, PC.

Certified Public Accountant
Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009
Email: jeff@jbrookswa.com