Trusts are people too. Well not really, but for income tax purposes they are kind of, sort of, treated like people.
Trusts are also kind of, sort of, treated like corporations.
This complicated mash-up of tax principles can lead to some confusion about where and how trusts are taxed. For a look at how states determine if a trust is subject to tax, check out the Bloomberg BNA 2016 State Trust Nexus Survey.
What happens after a trust determines they have nexus and an income tax liability in multiple states?
Unlike corporations who apportion their income among the states, trusts are generally subject to income tax based on their residency, and where trust income is sourced. This has the potential to lead to double taxation.
Double taxation occurs when multiple states tax the same income. For example, a trust that is a resident of state A and owns real property in state B, may be subject to income tax in both states for the income generated by that property.
In our newly added section of the Bloomberg BNA Trust Nexus Survey, credits for taxes paid to other states, we asked the states how trusts can address this issue.
Trusts, much like individuals, can usually claim a credit in their state of residence for income taxes paid to another state on income subject to tax in both. However, these credits for taxes paid to other states may not always be available to a trust.
Although a number of states offer credits to trusts, both for taxes paid to states where they are considered a nonresident and where they are considered a resident, they are not always straightforward.
In addition to the normal barriers that prohibit individuals from claiming these credits, such as if both taxes are based on income, a trust can be a resident in multiple jurisdictions. This could theoretically mean that income that cannot be sourced to one state may be taxed, without a credit, in each state where the trust is a resident.
Because of the complicated nature of trust residency, and the interaction between each taxing jurisdiction’s laws, understanding credits for taxes paid to other states can be integral to a trust.
For a discussion of the survey results, register for our webinar: Learning from the Bloomberg BNA 2016 State Trust Nexus Survey, Thursday Oct. 20, 2016 at 11:00 AM ET.
*Continue the discussion on Bloomberg BNA's State Tax Group on LinkedIn: How should states apply credits for taxes paid to other states to a trust that has nexus in multiple states?For more information about tax credits, check out Bloomberg BNA’s Credits and Incentives Portfolios by signing up for a free trial of the Bloomberg BNA Premier State Tax Library today
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