How to Calculate Trust Accounting Income
As a trustee, you may need to use the Trust Accounting Income (TAI) formula to calculate the amount of income from the trust that you can distribute to beneficiaries. In some cases, you will need to use the Trust Accounting Income formula to prepare Form 1041, the U.S. Income Tax Return for Estates and Trusts.
If your trust invests in foreign securities, follow the rules for distributing the foreign tax credit to the beneficiaries. If your trust makes quarterly distributions, follow the rules for fourth-quarter distributions and Section 663(b) elections as necessary.
Trust Accounting Income is the formula that determines how much income is available to be distributed to the income beneficiary. You calculate TAI by adding together all items of income and then subtracting all expenses attributable to income.
If you’re required to distribute all the income in the trust, calculating TAI gives you the exact number you need to pay the beneficiary. If you’re directed to pay a set amount, nothing at all, or you only make distributions at your discretion, calculating TAI is something you must do only when preparing your annual Form 1041, U.S. Income Tax Return for Estates and Trusts.
If you are a trustee of a trust that invests in foreign securities, you will likely have to pay foreign taxes from income earned from those foreign securities.
The U.S. has tax treaties with most of these countries that entitle you to claim a refund for the foreign taxes you’re paying. However, in most cases, you may choose to claim a Foreign Tax Credit on Form 1116, which you then attach to your Form 1041. Foreign taxes paid are not income taxes chargeable to the trust.
If you’re distributing the income from the trust, you’re probably also distributing the foreign tax credit to the trust’s beneficiary. If this is your situation, don’t subtract foreign taxes paid when calculating TAI.
What’s left after adding together income and subtracting all the income-related expenses is the trust’s TAI. If you’re administering a trust that requires income to be paid out currently, you need to calculate TAI before you can make distributions.
If you want to make distributions more frequently than annually, you can make an educated guess for the first three quarters of every year. Then, in the fourth quarter, you have to calculate TAI for the entire year and adjust the fourth quarter distribution accordingly.
Because the fourth quarter doesn’t end until December 31, the IRS gives you 65 days after the end of the calendar year to make your calculation and pay that final distribution. If you use this extra time to make a year end distribution, be sure to tick the box on question 6 at the bottom of page 2 of Form 1041. You’ve just made a Section 663(b) election for the trust.