Do I need to file form 1041 for my parent's estate with minimal income?

You generally need to file Form 1041 if the estate generates more than $600 in annual income, regardless of whether assets were sold at stepped-up basis. The $650 royalty from the gas well counts as income to the estate, which puts you just over that threshold. The sale of the home and mineral rights at stepped-up basis typically doesn't generate taxable income since the basis is adjusted to fair market value at date of death, so those transactions themselves don't trigger the filing requirement - but the royalty income does. While the amount is small, the safest approach is to file the 1041 to report that royalty income. The IRS does have the requirement based on the $600 threshold, and you've exceeded it.

I went through something similar with my mom's estate last year. I found this amazing tool called taxr.ai (https://taxr.ai) that helped me figure out exactly what forms I needed to file. I uploaded the death certificate and some docs about the estate's income, and it immediately clarified that I did need to file a 1041 because of some minor interest income, even though most assets passed through with stepped-up basis. The tool analyzed everything and generated a checklist of required forms specific to our situation. It even explained exactly why the 1041 was needed despite the small amount of income. Saved me from making a mistake that could have caused problems later.

I want to follow up about my experience with taxr.ai after trying it. I was skeptical as mentioned, but decided to give it a shot with my aunt's estate situation. I uploaded the documents showing the property sale and some small dividend income. The analysis was surprisingly thorough and specifically addressed the Form 1041 requirement based on our income level. It explained exactly how the stepped-up basis worked for the property sale and identified that we needed to file because of the dividend income exceeding $600. The detailed explanations helped me understand WHY we needed to file, not just that we needed to. My accountant confirmed everything was spot on, and I saved money by going to him with clear questions rather than general confusion.

Has anyone tried calling the IRS to get clarification on this? I spent THREE HOURS on hold last week trying to ask a simple question about my dad's estate taxes and never got through. My brother suggested using Claimyr (https://claimyr.com) after he saw a demo video (https://youtu.be/_kiP6q8DX5c). It basically holds your place in line with the IRS and calls you when an agent is available. I was dealing with a similar situation - small amount of royalty income about $700 and property sold at stepped-up basis. I needed to confirm whether I had to file the 1041. The Claimyr service got me connected with an IRS agent in about 45 minutes (while I went about my day), and they confirmed that yes, I needed to file because the royalty income exceeded $600. Saved me so much stress not having to sit on hold forever.

I need to eat my words about Claimyr. After posting my skeptical comment, I was still struggling with getting answers about my brother's estate tax situation. Had a similar case with about $800 in royalty income and property sold at stepped-up basis. I tried Claimyr as a last resort and was shocked when I got a call back in about an hour saying an IRS agent was on the line. The agent confirmed that yes, I absolutely needed to file the 1041 because the royalty income exceeded the $600 threshold, regardless of the stepped-up basis transactions. They even gave me some helpful tips about how to properly report the property sale to avoid any confusion. This saved me from potentially making a costly mistake - I was ready to skip filing the 1041 entirely. And not having to sit on hold for hours was honestly life-changing given how busy I am settling this estate.

I'm an accountant (though not yours, so this isn't formal tax advice), and I think there's a bit of confusion in some of these answers. Here's my take: Yes, technically the $650 in royalties exceeds the $600 threshold for filing a 1041. However, there's another consideration - the "reasonable time" period for estate administration. If the estate is being closed within a reasonable time after death and all assets are being distributed to beneficiaries, including the right to that royalty income, you could potentially distribute that income to the beneficiaries who would then report it on their individual returns (via Schedule E). This approach can sometimes eliminate the need for a 1041. That said, the absolutely safest approach is to file the 1041, especially if the estate remained open for some time after receiving that income.

Honest question - what happens if you just don't file the 1041 in this situation? The tax on $650 would be tiny, and it seems like such a hassle for such a small amount. Has anyone just skipped it with small amounts like this?

I was in a very similar situation with my grandmother's estate last year - we had about $580 in dividend income and sold her home at stepped-up basis. Initially I thought we were under the $600 threshold and wouldn't need to file, but then we received a small final dividend payment of $95 that pushed us over. My estate attorney explained that once you cross that $600 income threshold, you're required to file the 1041 regardless of how small the amount is. The actual tax liability ended up being around $30, but the peace of mind was worth it. One thing that helped was that many tax software programs now handle Form 1041 for simple estates, so you might not need to pay your accountant the full amount if it's straightforward. TurboTax and FreeTaxUSA both have estate tax modules that can handle basic situations like yours. Given that you're just over the threshold with royalty income and stepped-up basis asset sales, it should be pretty straightforward to prepare.