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Form 1041 - Allocation of Deductions for Tax-Exempt Income
1

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, 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.


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.

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 the TaxAct program:

Online Navigation Instructions
  1. From within your TaxAct return (Online), click the Tools dropdown, then click Forms Assistant.
  2. Click + next to the Worksheets manila folder, then scroll down and click Federal Statements.
  3. Click + Add to create a new worksheet, or click Form to edit a worksheet already created, then scroll down to the Tax Exempt Income Allocation of Expenses section.
Desktop Navigation Instructions
  1. From within your TaxAct return (Desktop), click Forms in the options bar to view Forms Explorer (if it is not already visible).
  2. Click the Worksheets dropdown, then scroll down and click Federal Statements to open the worksheet in Forms View.
  3. In Forms View, scroll down to the Tax Exempt Income Allocation of Expenses section.

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