Updated Sep 11, 2019

Trust funds are taxed differently, depending on the type of fund they are. A trust that distributes all of its income is considered a simple trust, otherwise, the trust is said to be complex. A tax deduction is made for income that is distributed to beneficiaries. In this case, the beneficiary pays the income tax on the taxable amount, rather than the trust.

The amount distributed to the beneficiary is considered to be from the current-year income first, then from the accumulated principal. This is usually the original contribution plus subsequent ones and is income in excess of the amount distributed. Capital gains from this amount may be taxable to either the trust or the beneficiary. All the amounts distributed to and for the benefit of the beneficiary are taxable to him or her to the extent of the distribution deduction of the trust.

If the income or deduction is part of a change in the principal or part of the estate’s distributable income, then income tax is paid by the trust and not passed on to the beneficiary. An irrevocable trust that has discretion in the distribution of amounts and retains earnings pays trust tax that is $3,011.50 plus 37% of the excess over $12,500.

Schedule K-1 is a form used for a number of different purposes. It depends on where it comes from, whether that’s an S corporation, a partnership, or a trust. In the case of a trust, distributed amounts generated by the trust are taxed and handed over to the IRS. The IRS, in turn, delivers the document to the beneficiary to pay the tax. The trust then completes Form 1041 to determine the income distribution deduction that is accorded on the distributed amount.

Finding a financial advisor will be the key to the establishment of a successful trust. If you are unsure how to proceed, contact me for some ideas. Pederson Accounting Services at 317-989-2708.
Pederson Tax Services