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Taxes On Irrevocable Trust Income

Hudson Law Firm Jan. 12, 2023

Uncle SamAn irrevocable trust is a type of trust that cannot be modified or terminated by the grantor, the person who establishes the trust. An irrevocable trust is treated as a separate taxpayer for federal income tax purposes and is required to file its own tax return if it has taxable income. The trust itself pays any taxes due on its taxable income, and the beneficiaries of the trust may also be required to pay taxes on any income or distributions they receive from the trust.

An irrevocable trust is generally required to obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS) if it meets any of the following criteria:

  1. The trust has a taxable income of $600 or more in a tax year.

  2. The trust is required to file an income tax return.

  3. The trust has any employees and is required to file employment tax returns.

If an irrevocable trust meets any of the above criteria and needs to obtain an EIN, it can do so by applying online on the IRS website, by fax, or by mail.

Federal Taxes

The IRS provides guidance on the tax treatment of trusts in the Internal Revenue Code (IRC) and in various IRS publications and rulings. The tax treatment of trusts is also governed by court decisions and state laws.

The IRC contains the general rules for the taxation of trusts, including rules for determining the taxable income of a trust, the tax rates that apply to trusts, and the filing requirements for trusts. The IRS also publishes guidance on specific topics related to trusts, such as the treatment of grantor trusts, charitable trusts, and generation-skipping trusts, in various IRS publications, including Publication 541, "Fiduciaries." In addition to the IRC and IRS publications, the tax treatment of trusts can also be determined by court decisions and state laws.

New Jersey Taxes

In general, a trust is required to pay state income tax on its taxable income if it is a resident trust or if it has income from New Jersey sources. A trust is considered a resident trust if it is administered in New Jersey or if a majority of its trustees are residents of New Jersey. A trust is considered to have income from New Jersey sources if the income is derived from property located in New Jersey or if it is derived from a business that is conducted in New Jersey.

It is important to consider all relevant guidance when determining the tax treatment of a trust. The tax treatment of an irrevocable trust can vary depending on the specific terms of the trust and the type of income it generates. If you have specific questions about the tax treatment of a trust, it is advisable to consult with a tax professional or an attorney.