Trust fund taxes, and the related reporting of them on annual returns, are among the most baffling topics for people who receive income from trusts throughout the year.
The good news is that trust fund taxes are not as complicated as they might seem at first glance, especially if you file with the help of a professional who has experience with trusts and their various types of distributions. Here are the key facts to keep in mind if you have trust fund income during any year:
Trusts are responsible for categorizing income types on year-end documents they send to beneficiaries. This makes filing easy if there are no other issues involved with trust income.
Beneficiaries need to remember that even if they receive a check from a trust in January, that money is taxable to the previous year if it was earned in that year. Just because the trust is a bit slow in cutting checks to you, you will still need to pay tax on funds for the year in which they were earned.
Trusts are allowed to write-off whatever amount of funds they pay to you, the beneficiary, throughout a given tax year. Though there are many wrinkles and complications in this formulation, the trust's deduction (its "write-off") is typically limited by what is called the Distributable Net Income. DNI is the amount of money the trust can pay to you each year and get a write-off for. Calculating the write-off is one of the specialties of tax preparers who have experience in this complex arena.
There's always the question of whether you or the trust owes taxes on income earned by the trust during the year. This depends on what type of trust it is: a revocable or irrevocable one. In the case of revocable trusts, the person who created the trust (called the "grantor") is the person who owes the tax, because technically the grantor still "owns" the trust assets.
With irrevocable trusts, the trust itself is treated as a "person" for tax purposes, and thus is the one who owes tax on any income earned by the trust during the year. Note that when you, the beneficiary, remove money from the trust, those funds are taxable to you, no longer to the trust.
Anyone who gets trust fund income should be very careful about correctly reporting those amounts to the IRS on their annual or quarterly tax return. Lone Star Tax Group, a Texas-based team of tax accounting professionals, is well-versed in all aspects of trust fund taxes and how to report them to individuals, corporations and other entities. The website, at www.lonestartaxgroup.com, is a one-stop location for anyone who has tax questions or challenges that call for professional help.
There's no reason to fret over trust fund taxes this year, or any year when you understand the key concepts about how to report this type of income.
Lone Star Tax Group