The tax-filing season has started, and taxpayers nationwide are gathering the information needed to file individual and corporate income-tax returns. What many people don’t realize, though, is that trusts and estates can also owe income taxes. According to the latest IRS tally, for one year alone (2013), some 3.1 million federal income-tax returns reporting more than $160 million of total income were filed for trusts and estates.
The questions and answers below give some details about the requirements.
WHEN IS A RETURN REQUIRED?
With limited exceptions, a return must be filed if the trust or estate has gross income for the year of $600 or more or if there is a nonresident alien beneficiary. A trust also has to file if it has any taxable income. Certain “grantor” trusts are exempted from filing an income-tax return. For example, many people create revocable living trusts for estate planning purposes. They name themselves (and perhaps a spouse) as the beneficiary and may serve as the trustee. In this situation, there are simplified reporting options and no separate return has to be filed for the trust.
WHO IS RESPONSIBLE FOR FILING?
When a return is required, the responsibility for filing it falls on the fiduciary — the trustee of a trust or the executor (personal representative) of an estate.
WHAT TAX RATES APPLY?
A trust or estate that distributes income to a beneficiary is generally not taxed on the distributed income. Instead, the beneficiary reports the income for tax purposes. Where income is taxable to the trust or estate itself, the tax is computed using a separate rate schedule. The rates are the same as the individual rates except that there is no 10% rate or 35% rate. The rate brackets, however, are compressed. In 2016, a trust or estate pays tax at the top 39.6% rate on taxable income over $12,400.