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Flashcards in Taxes: Income Tax of Fiduciaries Deck (9)
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1

Taxes:
Income Tax of Fiduciaries
Definitions

Definitions
Fiduciary
- trust & estates can be taxed on income accrued during admin of fiduciary, and not distributed to beneficiaries.
- income distributed to beneficiaries is reported as income on their tax return in which estate year ends
Trust
- legal entity created by transfer of property for grantor. Purpose is to hold and administer property for beneficiaries
Terminal Interest
- terminates upon occurrence of contingency
Remainderman
- person who gets remainder after present interest terminates
Contingent Interest
- interest created upon occurrence of a contingency

2

Taxes:
Income Tax of Fiduciaries
Fiduciaries

Fiduciaries
Single Taxation
- income taxed only once either to fiduciary or beneficiary
1. fiduciaries get personal exemption $600 for estates, $300 simple trusts and complex trusts that distribute all income currently, and $100 all other complex trusts
2. may be simple in some years and complex in others
3. fiduciaries get no standard deduction, but can deduct interest, taxes, charity, and trustees fees.
4. when income is distributed currently, fiduciary acts as conduit and beneficiaries are taxed on DI
5. investment advisory fees are usually subject to 2% AGI floor as misc itemized deductions
- executor can deduct admin fees on estate tax return or estate's income tax return, or executor return. same for casaulty losses

3

Taxes:
Income Tax of Fiduciaries
Fiduciary Accounting Rules

Fiduciary Accounting Rules
- receipts and disbursements are categorized as income or corpus
- Corpus: principal property of estate
- income & deductions are allocated among beneficiaries

4

Taxes:
Income Tax of Fiduciaries
Deductions & Distributions

Deductions & Distributions
- deduct distributions to beneficiaries
- fiduciaries pay income tax, including AMT, if undistributed net income

5

Taxes:
Income Tax of Fiduciaries
Distributable Net Income

Distributable Net Income
- Distributions of Income
- cannot exceed DNI
- DNI = amount of accounting "income" available to be distributed (capital gains belong to corpus)
- property distributions are treated as distributions of DNI
- beneficiaries taxed on receipt of distributions to extent of DNI
- beneficiaries report income for tax year in which estate/trusts year ends

6

Taxes:
Income Tax of Fiduciaries
Calculation of DNI

Calculation of DNI:
Taxable Income
+ Personal Exemption
+ Net Tax Exempt Income
+ Net Capital Loss
- Net Capital Gains allocable to Corpus
(estates & trusts 2-tier system
= DNI
***Shortcut: take accounting income and subtract net capital gains***

7

Taxes:
Income Tax of Fiduciaries
Formula

Income Tax Formula for Fiduciaries:
Gross Income
- Interest
- Taxes
- Business Expenses
- Depreciation
- Charitable Contributions
- Distribution Deduction (Max = DNI)
- Personal Exemption
= Taxable Income
X Tax Rates
= Gross Tax
- Credits
+ Extra Taxes
= Tax Payable

8

Taxes:
Income Tax of Fiduciaries
Procedural Rules

Procedural Rules
- Trust must use calendar YE, pay est income taxes
- Estates may use any YE, no est income taxes until after first 2 years of operation
- Both must file by 15th day after 4th month from YE
- Auto extension of 5 months
- Fiduciary must file if gross income > $600

9

Taxes:
Income Tax of Fiduciaries
Income in Respect of Decedent

Income in Respect of Decedent
- income not included in decedent's final return but was entitled to on date of death
- income and expense are reported on final return up to date of death (actually and constructively received)
- income in respect of decedent is taxed as income to the estate
- no step-up basis to FMV
- included on BOTH the estate income tax and estate tax return
- accrued expenses are deducted on both
- estates can deduct estate taxes on income in respect of decedent

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