Income discovered after final estate return filed

[neilbrink]

Form 1041 estate return was filed for 2015 calendar year as a final return.  Recently, family members found some E Bonds held in the decedents name, with interest of $22,200.00 accrued.  These will be cashed in in 2016.  Do I file another final return for 2016?  Never had this happen before.

[RitaB]

I think you'd prepare an amended 2015 return, unchecking the "final return" box and checking the "amended return" box. 

In the interest of full disclosure, I didn't search very long for an answer, nor did I find this situation addressed, but this seems logical.  That's about all I got.

[DANRVAN]

35 minutes ago, neilbrink said:

  These will be cashed in in 2016. 

Don't worry about the 2015 1041 checked final.

Report and file for 2016 and check final.

[Gail in Virginia]

I just thought I would confuse the situation.  You can elect, on the final 1040 for the decedent to report all of the savings bond interest on their personal return.  Sometimes, depending on the other income on that final 1040, this can be a significant savings.  So you might want to consider amending the 1040 instead and reporting all of the interest accrued through date of death (which might be all the interest if the bonds have ceased to earn interest) instead of going to the 1041. 

[SaraEA]

The election to report accrued interest must be made on a timely filed return (including extensions).  You cannot go back and amend the decedent's return for this.  You will have to amend the estate return.  Hopefully the estate made enough distributions not to have to pay income tax.  With this amount of interest alone, you are looking at the 39.6 bracket.  If it's not too late, perhaps the bonds themselves can be distributed to the beneficiaries.  They will have to pay tax on the accrued interest, which they will have to do anyway if the estate has been distributed, but at least they won't have to go back and amend their own returns.  Going forward they will just have to pay tax on the interest accrued each year, but that's not your problem unless they are also your clients.

I am working on one right now where bonds are still earning a guaranteed minimum of 4 percent.  The beneficiaries would be foolish not to want the bonds instead of cash--where can you get risk-free returns like that today?  Fortunately in this case I can declare the interest on the deceased's 2016 return, where it will be mostly negated by medical expenses.

[DANRVAN]

16 hours ago, SaraEA said:

The election to report accrued interest must be made on a timely filed return (including extensions).  You cannot go back and amend the decedent's return for this. 

That is correct, you cannot amend the original return to take the 454(a) election.  However, since it is a regulatory election, section 9100 relief is possible, but probably not worth the price of a private letter ruling in this situation.