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I need help with a basic trust concept: Who pays the taxes, the trust or beneficiaries, specifically if the trustee does not actually distribute the income.

LSTAX
Level 1

I believe that I am clean on a simple trust. A simple trust is required to distribute all income to the beneficiaries (equal to the  trust's income distribution deduction).  The K1 carries this income to the individual and beneficiary pays tax whether or not they actually received a distribution. Beneficiary pays the tax even if no distribution was actually made.

Complex trust taxation depends on the trust instrument instructions and state law, etc. So if trust is required to distribute all income annually or quarterly to beneficiaries but has discretion about capital gains/losses etc. I prepare the K1 with the income flowing to the beneficiaries, but what if the trustee did not actually distribute that income and the March 6th deadline for Section 663(b) election to treat the distribution as being made in the previous tax year has passed?

I was going by the assumption that if the wording in the trust document states that the trust must distribute income that even for a complex trust and even if the distribution is not actually made, it still flows to the beneficiary to pay tax.

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I can't tell sometimes if you are asking a question or making a statement.

If a trust has a requirement to distribute ordinary income, then the benes get taxed on it. Period. With or without distributions. Simple trust.

If the trust is not required to distribute income, then the trust pays the tax unless money is distributed. Complex trust.

** I'm still a champion... of the world! Even without The Lounge.

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I can't tell sometimes if you are asking a question or making a statement.

If a trust has a requirement to distribute ordinary income, then the benes get taxed on it. Period. With or without distributions. Simple trust.

If the trust is not required to distribute income, then the trust pays the tax unless money is distributed. Complex trust.

** I'm still a champion... of the world! Even without The Lounge.

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LSTAX
Level 1
Sorry for the confusion, I'm trying to give too much info.  Here is the question that is still worrying me.  Does the fact that all income is supposed to be distributed according to the trust instrument mean that the beneficiary pays tax on the income regardless of what was distributed or not distributed?  So the income will always be taxed to the beneficiary because it was supposed to go to them?  
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sjrcpa
Level 12
Yes

ex-AllStar
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LSTAX
Level 1
Thank you!
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the trust must distribute income that even for a complex trust and even if the distribution is not actually made, it still flows to the beneficiary to pay tax.>>

I agree.

** I'm still a champion... of the world! Even without The Lounge.
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LSTAX
Level 1
so even if the distribution was never made to the beneficiaries it was still correct to show the income on the K1 passed through to the beneficiary to pay tax on?  Some of my research implys that you have to ask what was distributed and have trust pay the taxes on what stays in the trust undistributed.  Otherwise, why is section 663(b) necessary?  Thank you for the help
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sjrcpa
Level 12
Some trusts allow distributions on a discretionary basis.

ex-AllStar
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LSTAX
Level 1
in this case, the trust instrument says to distribute trust income quarterly.  Capital gains and all other distributions are discretionary.  I have triggered the income to passthrough 100% ordinary income under Required, (Schedule B, line 9) - Lacerte screen 7.1.  The trust 1041 is on extension.  I just learned the trustee did not distribute the income to beneficiaries.  Do I need to take out the K1 entries and have trust pay tax?
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LSTAX
Level 1
does anyone know if the trust should pay tax on the ordinary income if the trustee never distributed the income to the beneficiaries? Thank you!
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<<The K1 carries this income to the individual and beneficiary pays tax whether or not they actually received a distribution. Beneficiary pays the tax even if no distribution was actually made.>>
** I'm still a champion... of the world! Even without The Lounge.
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sjrcpa
Level 12
The Trustee should hurry up and distribute the income as they were supposed to do.

ex-AllStar
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LSTAX
Level 1
sorry to be dense, but it does not matter that it is complex?  This income is still taxed to beneficiaries even if not distributed.
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