How to Report Living Trust Income on Your Taxes
Income earned on assets held in a revocable living trust is reported and taxed as if it was earned directly by the settlor of the trust. The Internal Revenue Service (IRS) considers a living trust that is revocable, or in which the settlor retains interest in or power over the assets, to be a "grantor trust." The trust is not a separate tax entity and does not file its own return.
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Instructions
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Report interest. Income earned on a living trust through taxable interest should be reported on Line 8a with your other earned interest; tax-exempt interest on Line 8b. Tax-exempt interest is usually that earned on municipal bonds or certain mutual funds. Do not include interest earned on an IRA or other retirement or Medicare account.
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Report dividends. Use Line 9a to report ordinary dividends, including those earned on assets held in a living trust. Qualified dividends, which meet certain holding duration requirements (60 days for common stock and 90 days for preferred), are reported on Line 9b.
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Report capital gains. If the income earned in the trust was through the sale of stocks or other property, it most likely reflects a capital gain. This sort of income should be reported on Line 13 of Form 1040, and included on Schedule D as either long- or short-term (asset held more or less than one year).
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Report real estate and other income. It is not uncommon for a living trust to hold income producing assets, such as rental properties or intellectual property earning royalties. This income, as well as that gained through a partnership or S corporation, are recorded on Schedule E and reported on Line 17 of Form 1040. If you received funds as a beneficiary of another trust, these are also recorded on Schedule E and Line 17.
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Tips & Warnings
A living trust becomes a separate tax entity after the death of the settlor, at which point the successor trustee must obtain a federal tax ID and either file a separate Form 1041 for the trust, if its income exceeds $600 in a single year, or Form 8855 to elect to have the trust taxed as part of the decedent's estate.
