I know that a trust or estate,for tax purpose, serves as a tax conduit whereby no income tax on it. Is my understanding correct? if correct, how come the IRS has income tax rates for estates and trusts?
2007-05-16 04:13:40 · 7 answers · asked by Mike 1 in Business & Finance ➔ Taxes ➔ United States
If a trust or estate distributes its current year's income to its beneficiaries, does the trust or estate need to pay income tax on its distribution?
2007-05-16 04:33:24 · update #1
You're mostly correct, since your basic trust for a decedent is a pass-through entity (or conduit, as you put it). However, a trust may be required to pay tax if it has earned income and has made no distributions to the beneficiaries. Also, an estate return (Form 706) is entirely different than a trust return (Form 1041), because it taxes the gross value of the estate-it's not a pass-through entity, so the estate could conceivably pay estate tax but not owe anything on a trust return because the trust distributed its assets to the beneficiaries.
Kind of complicated stuff that I've oversimplified, but I hope that answers your question.
2007-05-16 04:25:34 · answer #1 · answered by SuzeY 5 · 1⤊ 1⤋
You are incorrect! A trust or estate may be required to file a Form 1041 for income to the trust or estate. Even a small estate may be required to pay tax on income. If the Estate is large enough, an Estate Tax or "Inheritance Tax" is due on Form 706. The good news is that less than 3% of estates are subject to Form 706.
IRS is going after "abusive" trusts big time. Lots of con men are out there promoting sham trusts or offshore trusts. Beware!
2007-05-16 04:22:39 · answer #2 · answered by exirsman 5 · 0⤊ 0⤋
No, your understanding is not correct. If the estate value is high enough, there would be an estate tax paid by the estate, and if a trust has taxable income after deductions, the trust also has to pay income tax as well. Estates and/or trusts do have to pay taxes. There are ways to minimize or eliminate taxes on estates and/or trusts. I have included a link to estates and trusts to help you. A trust can avoid paying taxes if it passes the income and deductions through to the beneficiaries of the trust, but someone still has to pay tax on the income.
2007-05-16 04:19:47 · answer #3 · answered by Anonymous · 1⤊ 0⤋
Either the estate or the beneficiaries will pay taxes on the income. Sometimes it's more beneficial to let the beneficiaries pay taxes, since they may be in a lower tax bracket than the estate.
If the beneficiaries are supposed to pay taxes on the income, they should get a K-1 statement from the trustee/personal rep/executor.
2007-05-16 07:43:50 · answer #4 · answered by aj485 5 · 1⤊ 0⤋
No, you're not correct, and the fact that there are income tax rates for estates and trusts should have answered that question for you.
2007-05-16 05:30:07 · answer #5 · answered by Judy 7 · 0⤊ 3⤋
The sources taxes are paid up front by technique of the valuables itself, then something of the proceeds are divided up. she will have the means to no longer ought to pay taxes on the up front earnings for constructive. As for the have confidence, i'm uncertain despite if or no longer she'd ought to pay taxes, i do no longer think of so nonetheless.
2016-12-17 14:25:11 · answer #6 · answered by Anonymous · 0⤊ 0⤋
Do we pay tax on the sale of the home in the trust?
2015-04-27 11:17:04 · answer #7 · answered by ? 1 · 0⤊ 0⤋