How to Determine Tax Credits for an Estate or Trust
When filing taxes for an estate or trust, you can use tax credits to reduce the estate or trust tax liability. Enter the tax credits for your estate or trust on Schedule G of Form 1041. Credits available for estates and trusts include the foreign tax credit, nonbusiness credits, general business credits, and credits for prior year minimum tax. For some foreign tax credits, you will need to complete Form 1116.
After you’ve calculated the tax liability for your estate or trust, you’re ready to see whether you can reduce the tax with tax credits. Tax credits are dollar-for-dollar amounts that you subtract from your tax liability. These tax credits are much better than deductions.
Estates and trusts aren’t eligible for most of the tax credits individuals can take, and no credit on Form 1041 can reduce the tax liability below zero.
However, on lines 2a through 2d of Schedule G, you have the opportunity to reduce the trust or estate’s tax liability with the following credits:
Foreign tax credit: You’re entitled to take a credit for taxes you’ve paid to a foreign country with whom the U.S. has a tax treaty (which is almost everywhere, with a few exceptions like Iraq, Iran, and North Korea).
If the amount of foreign taxes paid is $300 or less, you can just fill in the amount actually paid on line 2a. However, if the amount is greater than $300, you have to become acquainted with Form 1116, Foreign Tax Credit.
The IRS understands that Form 1116 is time-consuming, which is why they allow you to skip it for relatively small amounts). The IRS estimates that it should take you about seven hours to complete Form 1116.
If you made income distributions to beneficiaries during the year, you should allocate the applicable portion of the foreign tax credit to the beneficiary as his or her percentage share of the total income.
Form 1116 has been known to bring even the most brilliant accountants to their knees. If you need to attach one of these forms to your return, you may want to consult a professional.
Other nonbusiness credits: You may not be able to take the child tax credit, but if the trust or estate purchases an alternative fuel car, you’re in luck. Place the credit for your hybrid automobile here, on line 2b of Schedule G.
General business credits: Enter the total of all the general business credits the trust or estate is entitled to on Form 3800, General Business Credit, on line 2c of Schedule G. If you made income distributions during the year, be careful not to include any credits on Form 1041 that are allocable to the income beneficiary.
Credit for prior year minimum tax: If the trust or estate paid AMT in a prior year, it may be eligible to reclaim some part of that tax on Schedule G, line 2d. Complete Form 8801, Credit for Prior Year Minimum Tax – Individuals, Estates and Trusts to see if this return qualifies.