How does a trust pay it's taxes?

[akmisterekbenson]

This is the first year for my child's complex, irrevocable trust and I have filled out a 1041. Because I didn't understand that trusts are taxed at a higher rate, I did not make any distributions. Therefore, the trust owes taxes. I want to pay the tax bill from the trust and also reimburse myself for the cost of Turbo Business. Does the trust make a check to the IRS and to me for my cost? Or does a check go to my child who then makes the payments? How is that handled next year when I'm asked to enter distributions from the trust? It doesn't seem like it should go on their K-1 as they didn't get to keep the funds.

[tagteam · Accepted solution]

" Does the trust make a check to the IRS and to me for my cost?"

Yes, and then the trust can deduct the amount it paid you for the cost of the tax preparation software on its 1041.

" How is that handled next year when I'm asked to enter distributions from the trust?"

In the event a distribution is made (or deemed to be made per the trust instrument), then the distribution is passed through on the K-1 as taxable income to the beneficiary to the extent of distributable net income (DNI). The trust, of course, receives an income distribution deduction (IDD) which generally results in the trust having no income tax liability (i.e., tax liability is shifted to the beneficiary).

[akmisterekbenson]

Clarification: I get 2 checks? One for the IRS and one for me? So next year when a distribution is made, is she taxed for both the distribution and the amount paid to the IRS and me?  In other words, are these 2 distributions added together?

[tagteam]

Since you paid for the software from your personal funds, the trust would write one check to you for reimbursement and another check to the IRS for any taxes due. As mentioned, the trust can deduct whatever it paid to reimburse you for the software but it cannot, at any time, deduct the amount of federal income tax it paid.

If anything is still not clear, please post again.

[akmisterekbenson]

I'm sorry for being so dense.  So I'm wondering how the trust accounts for the disbursements of those 2 items.  Next year when I file, I just put in the 2017 disbursements made to my daughter and no mention is made of the IRS and tax prep disbursements?

[tagteam]

If the trust makes a distribution to your daughter, that will be reflected as a distribution to a beneficiary on the trust's income tax return and your daughter will receive a K-1 to the extent income is passed through to her.

If the trust reimburses you for the software in 2017, that will be a deduction on the trust's 2017 tax return. The federal income tax paid by the trust, not being deductible for any purpose, will simply not be reflected on any future return.