March 6, 2022 Deadline to Reduce Estate & Trust Income Taxes
If you are the executor of an estate or the trustee of a trust, you should know that egregious high income tax rates apply to estates and trusts at very low levels of income. Despite the new tax act, in 2021, for estates and trusts, a 37% income tax rate as well as the 3.8% Net Investment Income (NII) tax kicks in at $13,051 of income. That’s not very high. For example, let’s say an estate has income of $213,051. The tax on the $200,000 (income in excess of the $13,051 threshold), at 40% equals a tax of $80,000. Ouch!
There is hope! Estates and trusts only pay tax on what’s not distributed. Distributions lower the income tax for the trust and at the same time increase the recipient’s personal income tax. However, individuals do not pay the highest rates unless they are wealthy. In our example, if there are four beneficiaries and each receives $50,000 (one-fourth of the $200,000) many individuals will only pay 10% – 24% on that $50,000 instead of 40%. Potential tax saving could range from $32,000 to $60,000 depending on the individual tax bracket of each beneficiary.
What Can I Do Now?
It’s not too late. There’s a rule allowing distributions made in the first 65 days of the next year to be treated as if made in the preceding year. A special election must be made on the Fiduciary Income Tax Return. This year’s deadline is March 6, 2022.
Are there Other Factors to Consider?
Yes. In addition to financial considerations, there are other factors to keep in mind. If a beneficiary is not financially savy and cannot manage money, or has a drug habit or is mentally unstable, you may not want to distribute the funds. These factors may outweigh the potential tax savings of larger distributions from a Trust or Estate.
Please contact a tax professional at Urbach & Avraham, CPAs for assistance with making distributions or any other tax related questions about managing a trust or estate.