Taxation of simple trusts is a two-part process that involves calculating any tax that may be owed by the trust and determining the portion of the trust distributions that will be taxable to the trust beneficiaries. The trust files its tax return on IRS Form 1041, pays any tax that may be due by the trust and sends a tax information letter known as a form K-1 to the trust beneficiaries that received distributions from the trust.
Requirements to File
A simple trust is an irrevocable trust in which the net income earned by the trust must pay out 100 percent to the entitled trust beneficiaries. You must file a tax return in the same manner as an individual, as the simple trust is a taxpayer. A simple trust must file IRS Form 1041 if it has a non-resident alien beneficiary (a person who does not reside in the United States and does not meet certain criteria under the Internal Revenue Code for tax purposes) or if the gross income of the trust is greater than $600. You can find Form 1041 on the IRS website, along with instructions for completing the form.
The Internal Revenue Code attributes certain taxes to the simple trust, which are paid out of the simple trust assets. For example, if the simple trust incurred any capital gains or losses as a result of buying and selling securities throughout the tax year, the simple trust would pay the associated capital gains tax or claim any losses when filing Form 1041. The taxes paid by the simple trust are separate and apart from any taxes that may be owed by the trust beneficiaries who receive income from the simple trust.
Deadlines for Reporting
The completion of the trust tax return Form 1041 generates Form K-1 and has a standard April 15 deadline for filing. If the Form 1041 is extended past the April 15 deadline that applies to most taxpayers, the trustee shall inform the trust beneficiaries to extend their own personal returns. Trust beneficiaries who receive income must wait until they receive the Form K-1 from the simple trust before filing any required personal returns.
Tax to Beneficiary
The K-1 specifically states the distributable net income that will be reported to the beneficiaries for inclusion in their personal income tax return Form 1040 and on what line of the return to place the information. Distributable net income, or DNI, is the taxable income portion of a simple trust that is required to be distributed. DNI is not necessarily the dollar amount of funds the beneficiary receives, as it is modified by fees, tax-exempt income and other items that may be allowed under the tax code.
Seek Professional Tax Advice
Any trust tax return, whether it is a simple or complex type trust, is complicated tax work. It is always a good idea to seek the advice of a tax professional regarding any trust tax filings, as laws regarding tax treatment of trusts change constantly.
Mary Frazier began writing in 2011 for various websites and has over 20 years of experience as a bank vice president and senior trust officer. Frazier is a Certified Trust and Financial Advisor, holds a Bachelor of Arts in economics from the University of North Florida and holds a Master of Science in finance from the College for Financial Planning.