Selected issues concerning the state income taxation of

Nonresident trusts and estates

Never before has there been as much complexity combined with the heightened risk associated with potential noncompliance. This article attempts to identify, although may not necessarily resolve, selected state income tax issues for nonresident trusts that are a direct result of recent challenges impacting state income taxation.

State income taxation issues for nonresident trusts and their taxpayers

Trusts have played a significant role in serving affluent families for centuries, and the basic federal statutory landscape for taxing trusts and their beneficiaries has remained relatively intact for about the past 50 years. However, the state income taxation of trusts has become an increasingly complicated and challenging task for trustees and their tax advisers in carrying out their responsibilities to both trust settlors and beneficiaries.

Similar to the taxation of resident individuals, most states tax a resident trust on all its income and tax a nonresident trust on income sourced to that state. Much has been written about the various state rules for determining when a trust is a resident trust. This article does not specifically review resident trust issues but instead focuses on selected topics relevant to nonresident trusts, including:

  • The allocation of state-sourced income between the trust and beneficiaries
  • Passive activity loss rules
  • Net operating loss rules
  • Throwback rules
  • Grantor trusts
  • Reportable transaction disclosure requirements, and
  • Estimated state tax payments and withholding

by Gregory A. Bergmann and Eric Johnson of Deloitte Tax LLP, originally published in The Tax Adviser on September 1, 2011

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