Did you know that you need to pay taxes on income from your trust? Have you? When dealing with a trust, a whole new set of taxation issues come into play and you may need help navigating the new tax issues you’re faced with. Income from your trust is always paid either to the beneficiary or accumulated within the trust itself. The grantor is the person who puts assets into the trust. The grantor and beneficiary can also be the same person.
The most common type of trust formed to avoid probate are revocable living trusts. These types of trusts are always grantor trusts. The tax identification number of that type of a grantor trust is usually the grantor’s own social security number. If that’s the case, all income is reported on the grantor’s Form 1040. There are also various types of grantor trusts that use a different tax identification number from the grantor’s social security number. Regardless of its type, if income is retained in the trust or otherwise not reported on the grantor/beneficiary’s Form 1040, then the trust must file a Form 1041, possibly paying a higher tax rate on the income than would be assessed upon the individual’s Form 1040 return.
If the grantor is not the beneficiary, then the trust may be simple or complex. A simple trust mandates payment of all income earned by the trust, at least yearly, to defined beneficiaries. A complex trust does not mandate payment of income and may allow for payments to non-beneficiaries, such as charities. A trust’s status as simple or complex can change yearly, depending on the actual facts, such as whether the trust generated any earnings.
Whether simple or complex, the income paid to a beneficiary is taxed to such beneficiary at his/her tax bracket. Taxes related to income retained by a complex trust is paid by the trust. When a trust retains income, it pays taxes at a steeper bracket than individuals. That federal bracket is 39.6% once $7,500 is retained by the trust entity. Complex trusts, whether the trust income is entirely paid to the beneficiary or not, must file a Form 1041 for any year where income exceeds $600.
We can help you make sure you’re filing all of the correct IRS forms for any type of trust. Contact Matlin Law Group today to speak with a knowledgeable trust taxation attorney.
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