Reliable _________
Financial, Accounting & Tax Advice

Do beneficiaries of a trust pay taxes?

Beneficiaries of a trust typically pay taxes on distributions they receive from the trust’s income. However, they are not subject to taxes on distributions from the trust’s principal. When a trust makes a distribution, it deducts the income distributed on its own tax return and issues the beneficiary a tax form called a K-1. The K-1 indicates how much of the beneficiary’s distribution is interest income versus principal and, thus, how much the beneficiary is required to claim as taxable income when filing taxes.

Interest Vs. Principal Distributions

When a trust beneficiary receives a distribution from the trust’s principal balance, he does not have to pay taxes on it, the reason being the Internal Revenue Service (IRS) assumes this money was already taxed before it was placed into the trust. Once money is placed into the trust, the interest it accumulates is taxable as income, either to the beneficiary or the trust itself. The trust must pay taxes on any interest income it holds and does not distribute past year-end. Interest income the trust distributes is taxable to the beneficiary who receives it.

Tax Forms

The two most important tax forms for trusts are the 1041 and the K-1. Form 1041 is similar to Form 1040. On this form, the trust deducts from its own taxable income any interest it distributes to beneficiaries. At the same time, the trust issues a K-1, which breaks down the distribution, or how much of the distributed money came from principal versus interest. The K-1 is the form that lets the beneficiary know his tax liability from trust distributions.

 

One thought on “Do beneficiaries of a trust pay taxes?

  1. Kourtney Jensen

    I had a CPA this past year help with my taxes but I think he didn’t complete the tax information correct to include my trust. My grandparents have had a trust for me since I was born but now I’m not sure if I need to be taxed on the money that is in the account or what needs to happen. Since it isn’t technically in my care, I don’t know if it falls on me since it is in my name.

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *

testimonials

Loading Quotes...

SUBSCRIBE TO OUR NEWSLETTER

GET IN TOUCH

latest news



GET IN TOUCH

INFORMATION





NEWSLETTER

Subscribe to our mailing list to be informed.