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Short-term capital gains (from assets held 12 months or less) and non-qualified dividends are taxed as ordinary income.
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In 2021 the federal government taxes trust income at four levels: However, this article will only address federal tax rates and exemptions, as the specific rates and regulations surrounding state trust taxation is beyond the scope of this article. Trusts pay federal, state and (when applicable) local taxes. Simple and complex trusts, however, have to directly pay taxes on all income, assets and tax events. With a grantor trust, the individual who established the trust pays all related taxes on the trust’s funds. They exert a potentially high degree of control over the trust’s assets depending on how the trust was established. Grantor Trust – A grantor trust is managed by the individual who established the trust. It does not distribute any of its principal.Ĭomplex Trust – A complex trust is generally defined as “not a simple trust.” A trust is generally considered complex if it distributes less than all of its earned income in a year if it distributes any of its principal or if it makes distributions to charities as well as named beneficiaries. It holds assets and distributes all of the income that it makes off those assets to the trust’s beneficiaries. Simple Trust – A simple trust is, as its name suggests, the most basic and the most common. The intersection of trusts and taxes can be complicated, but working with a financial advisor will clarify relevant issues so you can make good decisions. Or you might put the family home into a trust, creating a legal entity that will own the property potentially indefinitely to ensure that it will always stay in the family. For example, you might create a trust for your children’s college education, putting money into it which they can withdraw when they go to school. A trust is a legal entity that holds money and assets for future distribution or management. Man standing on a large letters that spell "TAX"