A revocable trust, also called a grantor trust, is considered to be a single entity for tax purposes. Since the trust is under the complete control of the grantor, he is able to include all trust information on his regular income tax filing, eliminating the need for the additional paperwork that is required for other types of trusts. This is also true of certain irrevocable trusts, depending on how the trust is set up and whether or not it meets certain IRS tests for grantor trusts.
1. Add all income from the trust to the grantor’s IRS Form 1040. As long as it is a revocable trust, any money made by the trust can be treated as individual income and does not need to be reported separately on Form 1041.
2. Determine what allowable expenses were made by the trust during the year. Allowable expenses for a trust are similar to those for an individual, and would include such things as operating fees or bank expenses. These are to be listed on the grantor’s Form 1040, along with his other expenses.
3. Calculate the income and expenses of the individual with the trust amounts included. These figures do not need to be separated from the other allowable income and expenses the grantor may have.
4. File the completed Form 1040 with the IRS for the grantor of the trust. This completes IRS filing requirements for a revocable trust. Only if the status of the trust changes do you need to file a Form 1041 or other supporting documentation.
- Trusts are established under state laws applicable in the state where the trust is established. Check with your state’s Department of Revenue to see if there are any forms you need to file in addition to the IRS filing required by the federal government.
- An irrevocable trust typically requires that an Employer Identification number (EIN) be established for the trust. This is because such trusts are no longer under the control of the grantor. All activities related to this type of trust must use the EIN as a means of identification.
- The IRS watches trusts carefully to make sure they are not created as a means of avoiding income taxes. It is essential to have all documentation in order and complete records on file in case of an audit. Trust owners and beneficiaries risk fines and tax penalties if the IRS determines that the revocable trust paperwork is not accurate.
Items you will need
- IRS Form 1040
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