Income Taxation of Trusts and Estates Flashcards Preview

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Flashcards in Income Taxation of Trusts and Estates Deck (11)
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1
Q

Filing Requirements

A
  • trusts and estates must file a return if they have more than $600 in gross income for the tax year.
  • a trust must file a return if it has any taxable income for the year
  • taxable trust files form 1041 to report income and distributions to beneficiaries
  • due date is the 15th day of the fourth month following the end of the entity’s tax year.
2
Q

Choice of Taxable Year

A
  • Trusts must use a calendar year unless they are tax-exempt, charitable, or a grantor trust.
  • Estates may choose a calendar or fiscal year
3
Q

Tax Treatment of Distributions to Beneficiaries

A
  • the income of a trust or estate is taxed to the beneficiaries if it distributed, and it is taxed to the trust if it is retained.
  • beneficiaries are also taxed on the amount that is required to be distributed even if it is not distributed.
4
Q

Tax Rates for Trusts & Estates

A
Rate - Taxable Income
15% - $0-$2,550
25% - $2,551-$6,000
28% - $6,001-$9,150
33% - $9,151-$12,500
39.6% - over $12,500
5
Q

Grantor Trusts

A

-when a grantor creates a trust and retains certain powers or control over a trust, the trust is considered a grantor trust, and the trust income will be taxed to the grantor.

6
Q

Powers that make a Grantor Trust

A
  • trust income is paid to the grantor or to the spouse
  • trust income may be payable to the grantor or spouse
  • trust income is accumulated for future distribution to grantor or spouse
  • trust income is or may be used to purchase life insurance on the grantor or spouse
  • grantor retains a reversionary interest
  • trust income is or may be used to discharge a legal obligation of the grantor or grantors family
  • grantor retains power to revoke or amend the trust
  • grantor can dispose of income or corpus at less than full value
  • the grantor can borrow from the trust without adequate security or interest
  • grantor retains the right to alter the beneficial enjoyment of the trust property or its income.
7
Q

Simple Trusts

A
  • are required to distribute all of their current accounting income to beneficiaries
  • cannot make charitable contributions and cannot make distributions in excess of current account income (no principal)
  • has a standard deduction of zero and personal exemption of $300.
8
Q

Complex Trusts

A
  • can accumulate income, make charitable contributions, and distribute principal to beneficiaries.
  • has a standard deduction of zero and personal exemption of $100.
9
Q

Trust Taxable Income

A

-determined by taking accounting income and subtracting a trust’s deductions and distributions.

10
Q

Distributable Net Income (DNI)

A
  • DNI includes capital gains, to the extent included in accounting income, and ignores capital losses, unless used to offset capital gains.
  • A trusts deductions for distributions cannot exceed its DNI
  • DNI includes tax-exempt income
  • the income distribution deduction does not include any tax-exempt income, as the tax-exempt income is not part of the trust’s taxable income. It does not include capital gains either
  • DNI is the ceiling for the amount to be included in the income of the beneficiaries
  • the trust avoids double taxation on DNI because there is a deduction for any income that is actually distributed to beneficiaries
11
Q

Estate Income Tax

A
  • income tax calculation is the same as for a complex trust
  • there is a personal exemption of $600
  • the expenses of administration may be deducted either on the estate’s income tax return or on the estate tax return, but not both.

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