One of the most important reasons for trust and estate planning is to minimize the tax burden on the recipients. While most tax activities end at the finish of a calendar year, there are exceptions for spending at the start of the new year – which can be used as deductions for the previous year. 

Here are a few things you need to know about options for managing taxable income with trusts and estates:

IRS Code Section 663(b): Allocating to the Previous Tax Year

Trusts and estates hit the top tax bracket at only $12,950 of taxable income. Including the Net Investment Income Tax (NIIT), this top rate is 40.8%. And that’s just for federal income taxes. Proper tax planning involves managing the timing of the beginning and end of the tax year, the receipt of income and payment of expenditures, and the payments of distributions to beneficiaries.  

A powerful technique available even after the end of the tax year uses Internal Revenue Code Section 663(b) to allow distributions after the end of the tax year to be “allocated” to the previous tax year. This can “push out” taxable income to the trust beneficiaries. This way the income is taxed at the beneficiaries’ much lower tax rates.  

65-Day Rule

To qualify for Section 663(b), trust distributions must be paid within 65 days of the end of the tax year. For trusts with a tax year that ended December 31, 2020, Section 663(b) can be applied to distributions paid during the period January 1, 2020, through March 6, 2020.

Keep in mind that the executor or trustee must make an active election and have a timely filing for the tax return to use these benefits. The election can be made for a portion of the distributions within a 65-day window. These benefits are not automatically extended without the election. Also, an election is irrevocable once it’s made.

Personalized Tax Recommendations

Disclaimer: Please note that Greenwald & Gerke is not a CPA firm and we do not provide tax advice. We bring this tax situation to your attention because it might benefit you. Please consult with your tax professional for personalized recommendations for your specific situation. 

Thank you to Michael Fitzsimmons, CPA for his contributions to this article!

Fitzsimmons Accountancy, A Professional Corporation

1450 Frazee Road, Suite 310

San Diego, CA 92108-4340

619-757-1500 ext. 102

Michael@Fitz-CPA.com 

www.Fitz-CPA.com

At Greenwald & Gerke, our goal is to help you navigate the various life changes that happen in retirement. Not only do we offer quality real estate services, but our team can connect you with other industry professionals who can offer advice and assistance for finances and more. For referrals to vetted professionals in your area, please contact us directly or if you’d like to learn more about achieving your goals in retirement, then contact us at (844) 782-9674.