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Hello, I have a question about how Trust funds are ...

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Hello, I have a question about how Trust funds are taxed:

How are trust funds taxed exactly? It seems that trust funds have a much higher tax rate on capital gains then people do.   I don't understand when the income of a trust, capital gains and dividends ect., are taxed at the higher rate tax rate for trusts and when a beneficiary can file a K-1 with his tax return and just have the income of the trust taxed at his lower tax rate?

I think the answer is that any money left in a trust and not "distributed" to the beneficiaries is taxed at the higher rate of the trust, and any money distributed to the beneficiary is taxed at his tax rates. That seems a bit bizarre to me, if that is how it works why would a trust ever not distribute all its income? Or is the rule that the trust is always taxed at its higher tax rates except on the final year of the trust (I guess because that is probably when a trust would trigger a large capital gain).      Thank you!
Submitted: 6 years ago.
Category: Tax
Expert:  Lev replied 6 years ago.

If the trust is required to distribute the income - the income is included into K-1 despite if it was actually distributed or not and will be taxed for beneficiaries.

The trust tax rates may be found on the page 27 instructions for the trust income tax return - http://www.irs.gov/pub/irs-pdf/i1041.pdf

graphic

Taxes for the trust are computed in the schedule G - http://www.irs.gov/pub/irs-pdf/f1041.pdf However if the trust has a long term capital gain and/or qualified dividends - you should use schedule D and schedule D worksheet.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22704
Experience: Taxes, Immigration, Labor Relations
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