Trust Tax Return: Everything You Need To Know About It

January 20, 2022    Taxagent Perth

Any trust with income above the minimum exemption limit for a financial year can file an income tax return. Trust beneficiaries usually pay taxes on the distributions they are offered from the trust’s income; the trust does not pay taxes. But these beneficiaries do not pay taxes due to distributions from the trust.  

When a trust distributes the income, it deducts some money distributed on the tax return; they issue beneficiaries with a tax form called K-1. The K-1 specifies the beneficiary’s distribution amount under interest income or principal income. They also specify how much money the beneficiary needs to claim as taxable income while filing a tax form. These processes require in-depth knowledge, and it’s right here that a tax agent Perth comes to the rescue. Before anything else, let’s take a look at how these agents work. 

Does Every Trust Pay Trust Tax Return?

It depends on the trust, as a trust is a different entity that can be taxed; whether a trust pays taxes is dedicated based on whether it is a simple trust, grantor trust or a complex trust. The simple and complex taxes have to pay income taxes, but grantor trusts do not pay any of the taxes. Instead, the one who granted the trust pays the taxes on the trust’s income. 

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Can A Trust File Its Income Tax Return?

Yes, a trust can file its tax return under the simple and complex trust category. A trust can file a tax return if it has any taxable income or a total income of $600 or more than that. In a grantor trust, if the grantor uses their social security number as the taxpayer’s identification number. It does not file an income tax return. Every tax document is issued directly to the grantor to provide information about the grantor’s tax return. 

On the other hand, if a grantor trust has its taxpayer identification number. It could file an income tax for gaining information. The pro forma tax return recognizes the trust as a grantor trust. It incorporates a grantor trust letter that has all the income items that can be reported on the individual’s trust tax return of the grantor. This way, only the grantor will pay the taxes. You need to get in touch with a Trust Tax Agent, who can help you throughout the process. 

Deductions Trust Can Claim From Its Income Tax. 

The deductions that a simple or complex trust can claim on the tax return are trustee fees, tax return preparer fees, state taxes paid and income distribution. Since a grantor trust is not a distinct taxpayer, it cannot claim the deductions. 

Tax Return Preparer Fees And Trustee Fees

For expenses of the trust like trustee fees and tax return preparer fees. Only the part available in the tax income can be deducted. For instance, if the trust’s income comprises $10,000 as dividends and $5,000 as an interest in tax-exempt, about 65% of the tax return preparer fees and trustee fees can be deducted. 

Income Distribution Deduction

To determine the deduction related to a trust’s income distribution, one must first calculate the trust’s distributable net income (DNI). The DNI equals the total trust income (that includes tax-exempt interest but excludes capital losses and gains), lesser deductions like state-paid tax, tax return preparer fees and trustee fees. 

  • The total distribution of the trust is higher than the DNI, the income distribution deduction= the distributable net income minus the tax-exempt interest. 
  • If the trust’s total distributions to beneficiaries are lesser than the DNI, the income tax deduction equals the total distribution minus total distributions multiplied with tax-exempt interest or DNI. 

The trust claims to have its income distribution deducted on its tax return, the deducted amount is passed to the trust beneficiary on a Schedule K-1. The trust beneficiary must also report the scheduled K-1 income items on their income tax return. 

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65-Day Rule

As per the 65-day rule, a trustee can distribute to trust beneficiaries under 65 days after the end of the year and treat the distributions as though they were made in the last tax year. The deadline for distribution is March 6 (March 5 for a leap year). 

  • An election has to be made on the income return of the trust for treating distributions made within the 65 days opening as done in the previous tax year. 
  • For the tax year 2020, if a trustee can make distributions to trust beneficiaries within March 6, 2021, they can treat the distributions as a previous year distribution. 

The trustee must claim the deduction of income tax distribution for the ’65 day rule’ on the previous year’s tax returns and shift the previous year’s income tax burden to the trust’s beneficiaries; the beneficiaries would be taxed lower than the trust. Some trustees could take advantage of the 65-day rule when the trust distribution to the beneficiaries in the year is less than the DNI of the trust in that year. For that, a trustee can make 65-day distributions up to the DNI of the trust to increase the income distribution of the trust.   

Associate With The Best Tax Agents 

Anyone who wishes to open trust and run it needs to know the tax systems in Australia. They need to know various rules and laws regarding tax paying for trusts. Contact the best tax agents in Perth who can help them in the process. People can associate with Tax Agent Perth, one of the best centers. Where tax agents of great experience can be hired to get information on taxes or do tax work.

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