Search Help Topics:

Tax-exempt income received by an estate or trust requires an allocation of expenses between taxable income and tax-exempt income. The allocation must be included with the estate or trust tax return.

Per IRS Instructions for Form 1041 and Schedules A, B, G, J, and K-1 U.S. Income Tax Return for Estates and Trusts, on page 36:

Other Information

Question 1

If the estate or trust received tax-exempt income, figure the allocation of expenses between tax-exempt and taxable income on a separate sheet and attach it to the return. Enter only the deductible amounts on the return. Don't figure the allocation on the return itself. For more information, see the instructions for Allocation of Deductions for Tax-Exempt Income, earlier.

Report the amount of tax-exempt interest income received or accrued in the space provided below Question 1.

Also, include any exempt-interest dividends the estate or trust received as a shareholder in a mutual fund or other regulated investment company.

On page 21:

Allocation of Deductions for Tax-Exempt Income

Generally, no deduction that would otherwise be allowable is allowed for any expense (whether for business or for the production of income) that is allocable to tax-exempt income. Examples of tax-exempt income include:

  • Certain death benefits (section 101),
  • Interest on state or local bonds (section 103),
  • Compensation for injuries or sickness (section 104), and
  • Income from discharge of indebtedness in a title 11 case (section 108).

Exception. State income taxes and business expenses that are allocable to tax-exempt interest are deductible.

On page 22:

Expenses that are directly allocable to tax-exempt income are allocated only to tax-exempt income. A reasonable proportion of expenses indirectly allocable to both tax-exempt income and other income must be allocated to each class of income.

To access the Tax-Exempt Income Allocation of Expenses worksheet in TaxAct:

  1. From within your TaxAct Online return, click Tools down the left to expand, then click Forms Assistant.
  2. Click to expand the FEDERAL Forms folder, then click to expand the Worksheets folder.
  3. Click Statements - Statements Worksheet, then click Add to create a new Form or click Form to review the Form already created.

To Print:

  1. From within your TaxAct Online return, click Print Center down the left, then click Custom Print.
  2. Check Statements - Statements Worksheet. You may need to scroll down in the section to locate the item.
  3. Click Print, then click the PDF link. Click the printer icon or the save icon (available when you hover your mouse over the PDF form) to print or save the PDF copy.

Note. If you see a message indicating you have not paid your return fees, click the View/Pay your return fees link, which will direct you through the Paper Filing steps. Continue through the screens until you have processed the payment for your product fees and then repeat the steps to print.

  1. Start your TaxAct Desktop program.
  2. Click Return from the drop-down at the top of your screen, hover your mouse over Review, then click Forms OR click Forms in the toolbar below the menu.
  3. Click to expand the Federal folder, then click to expand the Worksheets folder.
  4. Scroll down and click to expand Statements - Statements Worksheet, then double-click the form you wish to review. If a form is not already listed for you to review, double-click Add Copy to complete a new form.
  5. Enter the information directly on the form. For entries that appear as a blue number (indicating the information is entered on a supporting document), click the amount in the field, then click the manila folder icon to access the supporting document.

Note that any link in the information above is updated each year automatically and will take you to the most recent version of the document at the time it is accessed.


Was this helpful to you?