What Are Estate and Trust Income Taxes?

If an estate or trust earns income, that income may be subject to income taxes. Follow the federal government criteria for determining whether your estate, simple trust, or complex trust earned enough income to be subject to the federal income tax. If the estate or trust’s decedent had a tax home in a state with a state income tax, you must also file state income taxes.

Like individuals, partnerships, and corporations, estates and trusts have the ability to earn income — which means that income is subject to income tax. If you have more than $600 of income for an estate, $300 for a simple trust (all income must be distributed currently), or $100 for a complex trust (every other type of trust), you need to complete and file Form 1041, U.S. Income Tax Return for Estates and Trusts.

If the trust or estate has a tax home in a state with a state income tax, guess what? You get to file a state income tax return there.

How do you know where the estate or trust’s tax home is? In the case of an estate, the tax home is the state where the decedent was domiciled at the time of his or her death.

For a trust, the rules are slightly more complex. Basically, if the grantor (person who created the trust) resided in the same state as at least one of the trustees when he or she either set up the trust or died, the trust is deemed a resident of that state.

If there’s no match between the grantor’s and the trustee’s domiciles, then the trust is considered without a situs, or location, and no state income tax return is required.

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