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Do All Trusts Pay Income Taxes?

Loune-Djenia Askew, Esq.

Oct 11, 2024

Do all Trusts pay Income Taxes? It depends. Trusts are separate legal entities, but whether they pay income taxes depends on their type.

It depends. Trusts are separate legal entities, but whether they pay income taxes depends on their type. Simple and complex trusts pay their own income taxes, while grantor trusts do not. Instead, the grantor (the person who created the trust) is responsible for paying the taxes on the trust’s income.


What is a Simple Trust?

A simple trust is required to distribute all its income at least once a year, has no charitable beneficiaries, and cannot distribute principal. If a trust meets these conditions, it’s considered a simple trust. Otherwise, it may be classified as a complex or grantor trust.


What is a Grantor Trust?

A grantor trust is one where the grantor retains certain powers over the trust. These powers may include the ability to revoke or amend the trust, or the right to receive trust income. For tax purposes, a grantor trust is considered the same as the grantor. This means that the grantor reports the trust’s income on their personal tax return and pays the associated taxes.


Does a Trust File Its Own Tax Return?

Yes, if it’s a simple or complex trust, the trustee must file IRS Form 1041 if the trust has taxable income or gross income over $600. For grantor trusts, it depends on whether the trust uses the grantor’s Social Security number or has its own taxpayer identification number.


How Do Trusts Pay State Income Taxes?

Trusts may also be subject to state income taxes, depending on where they were established and where their trustees or beneficiaries reside. In Florida, there is no state income tax for trusts, but other states like California may impose taxes based on a trustee’s or beneficiary’s residency.


Tax Deductions for Trusts

Simple and complex trusts can deduct state taxes paid, trustee fees, and tax return preparer fees. They can also claim an income distribution deduction, which reduces taxable income based on distributions made to beneficiaries. Grantor trusts, however, cannot claim these deductions, as the grantor reports all income on their personal return.


For more information, contact our office at Askew & Associates, P.A. by calling 954-546-2699.


Disclaimer: this blog post is not intended to be legal advice. We highly recommend speaking to an attorney if you have any legal concerns.


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