574. How is the federal income tax computed for trusts and estates?Nuco Employeercline202014-07-29T20:27:00Z2014-07-29T20:27:00Z512216966UMKC5816817114Site Map/General Income Taxation/Trusts And EstatesTaxFactsDefaultArticle2005-11-22T00:00:00Z124121449-00-tf2.xml1449.00;#1717;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 2How is the federal income tax computed for trusts and estates?21600.0000000000TaxFactsDefaultArticleSBMEDIA\moss-admin2010-01-14T22:31:07Z574. How is the federal income tax computed for trusts and estates?Taxable income is computed by subtracting the following from gross income: allowable deductions; amounts distributable to beneficiaries; and the exemption. Estates are allowed a $600 exemption. For trusts that are required to distribute all their income currently, the exemption is $300; for all other trusts, $100. Certain trusts that benefit disabled persons may use the personal exemptions available to individuals.IRC Sec. 642(b). A standard deduction is not available.IRC Sec. 63(c)(6). Rates are determined from a table for estates and trusts (see Appendix B).For estates of decedents dying after August 5, 1997, an election may be made to treat a qualified revocable trust as part of the decedent’s estate for income tax purposes. The election must be made by both the executor of the estate and the trustee of the qualified revocable trust. A qualified revocable trust is a trust that was treated as a grantor trust during the life of the decedent due to his power to revoke the trust (see Q 575). If such an election is made, the trust will be treated as part of the decedent’s estate for tax years ending after the date of the decedent’s death and before the date that is two years after his death (if no estate tax return is required) or the date that is six months after the final determination of estate tax liability (if an estate tax return is required).IRC Sec. 645.Generally, income that is accumulated by a trust is taxable to the trust, and income that is distributable to beneficiaries is taxable to the beneficiaries.IRC Secs. 641(a), 652(a). A beneficiary who may be claimed as a dependent by another taxpayer may not use a personal exemption, and his standard deduction may not exceed the greater of (1) $500 as indexed ($1,000 in 2013 and 2014, up from $950 for 2011 and 2012); or (2) $250 as indexed ($350 in 2013 and 2014, up from $300 for 2010 through 2012) plus earned income.IRC Secs. 151(d)(2), 63(c)(5); Rev. Proc. 2009-50, 2009-45 IRB 617, Rev. Proc. 2013-15, 2013-5 IRB 444, Rev. Proc. 2013-35, 2013-47 IRB 537. The amount of trust income which can be offset by the basic standard deduction will be reduced if the beneficiary has other income (see Q 543, Q 552). Also, trust income taxable to a beneficiary under 19 years of age (24 for certain students) may be taxed at the parents’ marginal tax rate (see Q 517).IRC Secs. 651-652, 661-663.A charitable remainder trust is generally not subject to income tax (see Q 7985). However, beneficiaries of a charitable remainder trust are taxable on distributions (see Q 7982). A charitable lead trust is generally taxable as a grantor trust (see Q 575) if an upfront charitable deduction is claimed (see Q 7988). Otherwise, a charitable lead trust is generally taxed as described here. Proposed regulations would treat annuity distributions from charitable lead annuity trusts (CLATs) and unitrust distributions from charitable lead unitrusts (CLUTs) as made proportionately from all categories of trust income. State law or trust provisions providing otherwise would be ignored. The regulations would prevent such a provision from being used, for example, to allocate all taxable income to the charitable distribution with capital gain and tax-exempt income retained by the trust.Prop. Treas. Regs. §§1.642(c)-3(b), 1.643(a)-5(b).Deductions available to an estate or trust are generally subject to the 2% floor on miscellaneous itemized deductions.IRC Sec. 67(a). However, deductions for costs incurred in connection with the administration of an estate or trust that would not have been incurred if the property were not held by the estate or trust are fully deductible from gross income.IRC Sec. 67(e).Deductions excepted from the 2% floor include only those costs that would not have been incurred if held by an individual (those costs that would be uncommon for a hypothetical investor). Investment advisory fees incurred by a trust were subject to the 2% floor.Knight v. Comm., 128 S. Ct. 782 (2008), 2008-1 USTC ¶50,132 (U.S. 2008). Final regulations have been issued on the proper treatment of costs incurred by trusts and estates. The regulations provide that if a cost is unique to a trust or estate, it is not subject to the 2% floor, but if the cost is not unique to a trust or estate, it is subject to the 2% floor.Treas. Reg. §1.67-4. For taxable years beginning before 2009, taxpayers can deduct the full amount of bundled fiduciary fees without regard to the 2% floor.Notice 2008-32, 2008-11 IRB 593; Notice 2008-116, 2008-52 IRB 1372. For taxable years beginning on or after May 9, 2014, bundled fiduciary fees must be allocated between fully deductible expenses and those subject to the 2% floor. Treas. Reg. §1.67-4(c) Any reasonable method may be used to allocate a bundled fee.For distributions in taxable years beginning after August 5, 1997, the throwback rule for accumulation distributions from trusts in IRC Sections 665-667 has been eliminated for domestic trusts, except for domestic trusts that were once foreign trusts, and except in the case of trusts created before March 1, 1984, which would be aggregated with other trusts under the multiple trust rules.IRC Sec. 665(c). Generally, for those trusts subject to the throwback rule, if a trust distributes income which it has accumulated after 1968, all of the income is taxed to the beneficiary upon distribution. The amounts distributed are treated as if they had been distributed in the preceding years in which the income was accumulated, but are includable in the income of the beneficiary for the current year. The “throwback” method of computing the tax in effect averages the tax attributable to the distribution over three of the five preceding taxable years of the beneficiary, excluding the year with the highest and the year with the lowest taxable income.IRC Secs. 666-667.Excess taxes paid by the trust may not be refunded, but the beneficiary may take a credit to offset any taxes (other than the alternative minimum tax) paid by the trust. However, a beneficiary who receives accumulation distributions from more than two trusts may not take such an offset for taxes paid by the third and any additional trusts. But if distributions to a beneficiary from a trust total less than $1,000 for the year, this penalty will not apply to distributions from that trust.IRC Secs. 666-667.Distributions of income accumulated by a trust before the beneficiary is born or before he attains age 21 are not considered accumulation distributions and thus are not generally subject to the throwback rules.IRC Sec. 665(b).Estates are required to file estimated tax for taxable years ending two years or more after the date of the decedent’s death.IRC Sec. 6654(l). Trusts are generally also required to pay estimated tax (see Q 499). However, there are two exceptions to this rule: (1) with respect to any taxable year ending before the date that is two years after the decedent’s death, trusts owned by the decedent (under the grantor trust rules) and to which the residue of the decedent’s estate will pass under his will need not file estimated tax (if no will is admitted to probate, this rule will apply to a trust which is primarily responsible for paying taxes, debts and administration expenses); and (2) charitable trusts (as defined in IRC Section 511) and private foundations are not required to file estimated tax.IRC Sec. 6654(l). A trustee may elect to treat any portion of a payment of estimated tax made by the trust for any taxable year as a payment made by a beneficiary of the trust. Any amount so treated is treated as paid or credited to the beneficiary on the last day of the taxable year.IRC Sec. 643(g).