How Much Will Irrevocable Trust Pay in Taxes on Undistributed Income?
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Question:
If I have an irrevocable trust that the grantor can’t touch. How much will the trust pay if it doesn’t distribute any of its income?
Response:
I will assume that the trust that your describing is not a grantor-trust for tax purposes. If it were, the income would be taxed to the grantor even though it’s not being distributed. Non-grantor trusts, in contrast, pay taxes at the trust tax rates which, in 2021 are as follows:
- Income of up to $2,650 – 10%
- $2,651 – $9,550 – 24%
- $9,551 – $13,050 – 35%
- Above $13,050 – 37%
As you can see the rates get up to 37% a lot more quickly than they do for personal income taxes. For example, a trust earning $20,000 (after possible deductions) that retained all its income would pay $5,717.50 in federal income taxes, plus potentially some state income taxes. The same amount distributed to beneficiaries in the 22% bracket for examples, individuals with income between about $40,000 and $85,000, would pay $4,400 in federal income taxes on the distribution.
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