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While serving as a trustee of a trust, it is your responsibility to file the trust’s income tax deductions. Trusts must file income tax returns when they have earned taxable income for the tax year, when they receive gross income of $600 or more, or when a beneficiary is also a nonresident alien. The trust is treated as a separate legal entity for federal tax purposes; the trustee reports income taxes for the trust on Form 1041.

Allowable income tax deductions

Similar to an individual’s income tax return, trusts are also permitted to take certain deductions to offset some of their income. Following are examples of deductions that trustees may be permitted to utilize on the trust’s income tax return:

  1. Repairs to real estate held by the trust
  2. Some or all of the distributions made to the beneficiaries of the trust
  3. State, local, and real property taxes
  4. Expenses of the estate
  5. Administrative expenses, such as trustee fees
  6. Other miscellaneous itemized deductions subject to a limitation of 2% adjusted gross income

Income Tax Deductions That Are Not Permissible

There are certain deductions, however, that trusts are not permitted to take. For example, trustees may not deduct the following:

  1. Depreciation and depletion expenses. Instead, these costs are apportioned between the trust and the beneficiary.
  2. Charitable contributions paid from current trust income except in cases where the trust agreement authorizes it.

Trustees must complete and file income tax returns for the trust for each tax year. There are certain income tax deductions that are permissible to offset such income. For more information about administering trusts in Orange County, sign up for our free newsletter or connect with us on Facebook today.

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