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Trust income taxes

March 5, 2023 Deadline to Reduce 2022 Estate & Trust Income Taxes

January 16, 2023 by Pamela Avraham

If you are the executor of an estate or the trustee of a trust, you should know that egregious high income tax rates apply to estates and trusts at very low levels of income.  In 2022, for estates and trusts, a 37% income tax rate as well as the 3.8% Net Investment Income (NII) tax kicks in at $14,451 of income. That’s not very high.   For example, let’s say an estate has income of $214,451. The tax on the $200,000 (income in excess of the $14,451 threshold), at 40% equals a tax of $80,000. Ouch!

Suggestions?

There is hope!  Estates and trusts only pay tax on what’s not distributed. Distributions lower the income tax for the trust and at the same time increase the recipient’s personal income tax. However, individuals do not pay the highest rates unless they are wealthy. In our example, if there are four beneficiaries and each receives $50,000 (one-fourth of the $200,000) many individuals will only pay 10% – 24% on that $50,000 instead of 40%.  Potential tax saving could range from $32,000 to $60,000 depending on the individual tax bracket of each beneficiary.

What Can I Do Now?

It’s not too late. There’s a rule allowing distributions made in the first 65 days of the next year to be treated as if made in the preceding year. A special election must be made on the Fiduciary Income Tax Return.  This year’s deadline is March 5, 2023. 

Are there Other Factors to Consider?

Yes.  Frequently, the main purpose for a trust is not to save taxes, but rather control. If a beneficiary can’t manage money, is a spendthrift, gambler, drug addict or is mentally unstable, you may not want to distribute the funds. These Factors may outweigh the tax savings of distributions from a Trust or Estate.

Please contact us for assistance with making distributions or any other tax related questions about managing a trust or estate.

Filed Under: Estate Taxes, ESTATE, TRUST, GUARDIANSHIP, Income Taxes, Uncategorized Tagged With: 65-day rule, Estate income taxes, Fiduciary income tax, Trust income taxes

Distribute by March 6, 2017 to Reduce 2016 Estate & Trust income taxes

February 20, 2017 by Admin

If you are the executor of an estate or the trustee of a trust, you should know that egregiously high income tax rates apply to estates and trusts at very low levels of income. In 2016, for estates and trusts, the 39.6% income tax rate as well as the 3.8% Net Investment Income (NII) tax kicks in at $12,400 of income. That’s not very high. And don’t forget, you don’t need $12,400 of investment income to pay the NII tax. If the total income exceeds the $12,400 threshold, the NII tax might be due on all of the investment income. For example, let’s say an estate has income of $212,400. The tax on the $200,000 (income in excess of the $12,400 threshold), at 43.4% equals a tax of $86,800. Ouch!
Help! Is there any hope?
Yes, the estate and trust only pays tax on what’s not distributed. Distributions lower the income tax for the trust and at the same time increase the recipient’s personal income tax. However, individuals do not pay the highest rates unless they are wealthy. In our example, if there are four beneficiaries and each receives $50,000 (one-fourth of the $200,000) many individuals will only pay 15% on that $50,000. That’s $7,500 per beneficiary for a total of $30,000 instead of $86,800 for a tax savings of $56,800.

Is there anything I can do?
It’s not too late. There’s a rule allowing distributions made in the first 65 days of the next year to be treated as if made in the preceding year. A special election must be made on the Fiduciary Income Tax Return. This year’s deadline is March 6, 2017. Executors and trustees should act soon to take advantage of this opportunity for substantial tax savings.

Please contact us for assistance with making distributions or any other tax related questions about managing a trust or estate.

Filed Under: ESTATE, TRUST, GUARDIANSHIP, Income Taxes Tagged With: Estate income taxes, Trust income taxes

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