An estate is a separate legal entity that begins upon the death of an individual. Income received from property of the decedent belongs to the estate until that property is transferred to beneficiaries of the estate. The estate’s income is reported in a similar manner as an individual's. For example, dividend income is reported on a tax return of the estate. A deduction is permitted on the estate’s tax return for distributions to beneficiaries. This includes completed distributions as well as those required but actually paid in a future year. The estate is therefore not taxed on dividends that it distributes to beneficiaries. Instead, the beneficiaries report their respective shares of distributed dividends.
Record dividend income received by the estate on Lines 2a and 2b of Form 1041 as described in the instructions.
Complete Schedule B of Form 1041 to report distributions of estate income to beneficiaries.
Send a Form K-1 for Form 1041 to each beneficiary indicating distributed or distributable dividends reportable on the tax returns of beneficiaries.
Record on the final tax return of the decedent all dividends reported on Form 1099-DIV having the tax identification number of the deceased individual. Subtract from the total on the personal tax return the amount of dividends belonging to the estate after the individual’s death. Write on the personal return the tax identification number of the estate on whose tax return the dividends are reported for tax calculation.