Tax Time Questions with Independent Tax Preparer Deborah Ritz

What’s the deal with trusts, revocable and irrevocable?

What are the Filing Requirements for Revocable and Irrevocable Trusts?

My parents established a revocable trust years ago and the income in the trust was always added to their personal income tax, even after my mother died.

My father converted the trust to an irrevocable trust in 2011 and then died in 2012.

What are the filing requirements for those trusts?

It is important to identify what type of trust you have because this directly affects your tax filing requirements relative to the trust.

When a revocable trust is created, the law treats the trust as simply an extension of your property for all purposes except probate.

This means that any trust income is simply your income, so you just include that income on your personal tax return each year.

In other words, you file a 1040 “U.S. Individual Income Tax Return” adding any income from the trust to that return.

An irrevocable trust is treated as an independent taxable entity and is not an extension of the trustor, which means the irrevocable trust earns its own income.

Irrevocable trusts require the filing of an annual trust income tax return with the IRS.

The first step, though, is to obtain a Taxpayer Identification Number from the IRS for the trust.

The IRS has created a specific tax return for such trusts. The form is IRS Form 1041 “U.S. Income Tax Return for Estates and Trusts.”

The form is much like an individual income tax return (form 1040), except that all of the questions relate specifically to the property and income of the trust.

Most trusts allow the trustee to hire a professional tax preparer, and the trustee can pay the tax professional with trust funds.

States that impose a state income tax may also require the preparation of annual state income tax returns, but these requirements vary widely depending on where you live.

You will also need a final return for both revocable and irrevocable trusts.

The trustee must file a final estate tax return within nine months after the trustor dies.

Additionally, the trustee must file a final income tax return by April 15 of the year following the year in which the trustor dies.

Finally, some states impose estate and/or income taxes, and if so, the trustee will also need to file the appropriate state tax returns.

Again, those state requirements vary widely depending on where the trust is located.

 

Questions for Deborah Ritz can be e-mailed to WeeklyADK@yahoo.com

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