Income Taxation of Trusts and Beneficiaries
Who Pays the Tax?
Trust income may be taxed either to the trust or to the beneficiaries depending on whether the income is retained or distributed. Trusts generally receive a deduction for qualifying distributions, while beneficiaries report distributed taxable income.
- Retained income generally taxed to the trust.
- Distributed income generally taxed to beneficiaries.
- Distribution deduction reduces trust taxable income.
- DNI limits taxable distributions.
Tip
Always determine whether trust income is retained or distributed before identifying the taxpayer.
Summary
Trust taxation allocates taxable income between the trust and its beneficiaries.