Ohio's Income Tax on Trusts Is Here To Stay

Ohio’s temporary income tax on trusts expired at the end of 2004.  However, as part of a tax reform bill effective July 1, 2005, the tax is back.  This time, it’s permanent.  The law now requires many trusts to file and pay Ohio income tax.

Q.: I have created a revocable living trust for estate planning purposes. Will I have to file a separate tax return and pay income tax on the income from the assets in the trust because of this law?

A.: In most cases, no. Generally, you will report income from a revocable trust (one that can be revoked or cancelled) on your personal income tax return, so you will not have to file a separate tax return for the trust. You must report the income from the trust on your personal income tax return because you, as the “grantor” or creator of the trust, are considered the owner of the trust’s assets. As the owner of the assets, you generally are responsible for reporting and paying the taxes on any income they generate.

After your death, a trustee will be responsible for paying taxes on your trust’s income.  If the trust provisions allow the trust to accumulate income each year but do not require it to pay the income to any beneficiary that year, then the trustee generally must file a separate return for the trust to pay tax on the income generated by the trust assets. This is because after your death, the trust becomes irrevocable (meaning it cannot be revoked, or cancelled) and you, the grantor, no longer own the assets. The income generated by the trust assets must be reported on an income tax return. If the income is paid to a trust beneficiary, such as a child or grandchild, then the beneficiary will report the income on his or her personal income tax return.

Q.: What types of trusts have to pay Ohio’s income tax?

A.: The most common type of trust that this law impacts is one that files a separate federal income tax return. Trustees report trust income to the IRS on Form 1041. If the trust files a separate federal return, and is also connected with Ohio in some way, it generally must file an Ohio return. For example, the trust must file a separate Ohio income tax return if the trust resides in Ohio (generally, a trust “resides” in Ohio if the grantor lived in Ohio when the assets were transferred to the trust and there is an Ohio beneficiary), or if the trust earns or receives income in Ohio or has winnings from the Ohio Lottery Commission or has some other close connection with Ohio.

Q.: What type of income is taxed by the Ohio Trust Income Tax?

A.: Income that is paid to a trust beneficiary in the current year will be reported on the personal income tax return of the beneficiary. Income that is not paid to a beneficiary, but rather kept in the trust, will generally trigger the requirement to file a separate income tax return for the trust. The types of income held in a trust that may be taxable are certain business income, capital gains on the sale of assets, dividends and interest.

Q.: I have an irrevocable trust that will be filing a separate income tax return under this law. Must the trust pay quarterly estimated tax payments?

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In order to avoid penalties and interest, the trust must  make quarterly payments on or before the 15th of April, June, September and January.  Since the law was re-enacted midway through 2005, many practitioners are resuming quarterly estimated tax payments with the September payment.

Q.: What are the tax rates for the Ohio Income Tax on Trusts?

A.: The same income tax brackets and rates that apply to individuals and estates will apply to the Ohio Income Tax on Trusts.

Q.: Should I be concerned with the Ohio Income Tax on Trusts?

A.: Yes.  The Ohio Income Tax on Trusts has been re-enacted as a permanent part of Ohio’s tax structure.  Therefore, you should ask a qualified professional to review your trust to determine if you must file a trust tax return under this law.

The information contained herein is general and should not be applied to specific legal problems without first consulting with one of our attorneys.


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