Tax Treatment of Dividends From Trusts

by Alexis Lawrence

When an individual purchase shares of a stock, that stock may pay dividends. Based on the value of the stock, these dividends generally pay out quarterly, providing a steady incentive for the stock owner. If the stock transfers into a trust upon the death of the original owner, the dividends from the stock continue to pay out to the owner’s heirs. Like the original owner, the individuals who receive these dividends must pay taxes on them.

Knowing the Amount of Dividends

An individual must beginning paying taxes on stock dividends in the tax year in which he receives the first dividend from the trust. The financial institution who handles the trust, not the corporation who pays the dividends, should provide each individual who receives dividends through a trust with a Schedule K-1. The Schedule K-1 form lists the total amount of dividends and other financial payouts that an individual receives from the trust in that tax year.

Figuring the Income

Whether or not an individual receives the Schedule K-1 form from the financial institution handling the trust, that individual must still pay taxes on any dividends and other distributions, so she should keep track of all dividends and other payments from the trust throughout the year. When it comes time to fill out her tax return, dividends and distributions received from a trust go along with her earned income.

Filling Out the Form

All stock dividends from a trust should be added together for tax purposes and entered into the standard tax return form, Form 1040, in the “Income” section next to “Ordinary Dividends.” To report dividends properly, an individual must also complete Schedule B of Form 1040, which lists dividends as line items. When the tax form is figured, the dividends become part of the year’s earned income for the individual, along with money earned through employment.

Sold Stock

If a trust stipulates that the heirs of the trust may make a joint decision to sell any investments held in the trust, such as stock, the heirs may choose to sell the stock shares and each receive one lump sum payment. If the heirs sell the stock in the trust and receive the profits, those profits list next to “Capital Gains” under the “Income” section and each heir must fill out Schedule D to list the stock sale as a line item.