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Are the earnings on funds in a trust taxed?

On Behalf of | Jan 10, 2023 | Trusts |

Trust funds have long been a popular way to ensure long-term financial security for generations in Maryland. But did you know that trust fund earnings can also be taxed? Trust fund earnings are taxable as income. To avoid any surprises when filing taxes, it’s important to understand how these types of income are taxed and to plan to maximize your returns.

How are trust fund earnings taxed?

Income tax is levied on the total amount of earnings generated by the trust fund, regardless of the distribution methods of those earnings. In addition, the Internal Revenue Service (IRS) imposes income tax at the federal level, and states may also impose income tax on trust fund earnings.

Capital gains tax is levied on the profit realized from the sale of assets held in the trusts. Capital gains tax rates are typically lower than income tax rates, so it may be advantageous to hold onto assets in a trust fund for long-term growth. However, capital gains taxes may apply even if assets are not sold, depending on state law.

Who pays taxes on trust fund earnings?

As the grantor of a trust, you are typically responsible for any taxes owed on earnings generated by the trust. This is true even if you are not the beneficiary of the trust. In most cases, taxation on trust fund earnings is at the same rate as your personal income tax rate.

Exceptions

There are a few exceptions to this rule. For example, setting up the trust as a charitable trust, the earnings may be subject to different tax rules. Additionally, some trusts may be exempt from paying taxes on their earnings altogether. Therefore, speaking with an accountant or tax professional is essential to determine what taxes are owed on your trust fund earnings.

Like other investments

Trust fund earnings, like other investments, can be taxed depending on the type of trust and how it is set up. Therefore, it is important to be aware of the tax implications of a trust fund. With careful planning and understanding of current laws, you can ensure that your trust fund will remain as financially viable as possible for future generations. Doing so can provide your family’s financial security for years to come.