Trusts may be subject to local and state taxes in addition to federal taxes. When you are estate planning, you should be aware of all tax implications of your options and choose which strategy allows the most money to go to your beneficiaries.
Income tax return
Beneficiaries of an estate who live in California need to report income from trusts on their state income tax returns. This holds true even if the decedent is from another state. California may charge failure to file and failure to pay penalties if you don’t. Just as with federal taxes, California charges interest for late payments. Trustees must file a tax return for trusts with a net income over $100 or a gross income over $10,000. Trusts that receive even partial income from a California source are subject to the state’s tax laws.
Options for tax compliance
If you didn’t know that you need to pay taxes on your trust, California offers a Voluntary Disclosure Program. The California Franchise Tax Board may waive tax penalties and filing requirement penalties for you.
Type of trust
The type of trust you set up determines who pays the federal taxes. Simple and complex trusts must pay taxes on income and assets. The person who sets up a grantor trust is responsible for paying taxes on the trust’s funds.
Federal tax rates for trusts
Tax rates may change by the year. In 2022, trusts from $0 to $2,750 had a federal tax rate of 10%. The three other levels are 24% for $2,751 to $9,850; 35% for $9,851 to $13,450; and 37% for $13,451 and higher.
Although trusts can help reduce your estate taxes, there are still taxes. You must report the trust income on your state tax returns as well as pay the federal taxes.