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I have a situation where there is a trust that is the beneficiary of my client's IRA. If the income emanating from the trust exceeds the RMDs, how is the difference taxed??


Expert Cory Bunger's Answer:

The trust is a separate entity and is responsible for paying income tax just like an individual or business.  The trust income tax return is IRS Form 1041.  If the trust is a beneficiary of an IRA and receives RMDs, then the trust is responsible for paying the tax on the RMDs.  In addition, the trust is responsible for reporting and paying tax on the income produced by the trust during the year.


However, the trust can avoid paying taxes on the RMDs and income by passing those earnings out to the beneficiaries during the year.  The individual beneficiaries would then receive a K-1 Form from the trust at the end of the year, which would enable them to report the income on their individual tax returns.  This is typically a better planning strategy, as the trust income tax rates accelerate much faster than individual income tax rates.


The trust agreement will dictate whether or not you're allowed to pass out income to the beneficiaries.  Review the trust agreement for guidance on this issue. 

Cory Bunger, CPA

North Carolina

17 yrs experience

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