Members of the Maryland Association of Certified Public...

Tax answers

April 08, 1996

Members of the Maryland Association of Certified Public Accountants are answering readers' tax questions through April 15.

Q: I'm interested in setting up a trust for a disabled child. What are the income tax rates and tax consequences for income from an irrevocable trust?

A: The income tax rate for trusts and estates in 1996 are graduated and adjusted for inflation. Generally, for 1996 the rates are: 15 percent for the first $1,600, 28 percent of the next $2,200, 31 percent of the next $2,100 and 39.6 percent of amounts over $7,900. As you can see, these rates are substantially higher than those for individuals. Trust or estate income is taxed to the trust or estate if retained or to the beneficiary if distributed. Thus, if the income is passed on to the beneficiary, the trust or estate deducts the distributed income, which then becomes taxable to the beneficiary. Income that has been passed to the beneficiary generally has the same character and attributes in his hands as when received by the trust or estate, e.g., capital gains, interest, rent, etc.

However, there are several differences between an individual's return and that of a trust or estate when computing income (e.g., allocation of capital gains between the trust and the beneficiary) and deductions in determining the correct amount of taxable income. These differences, combined with the considerations involved in the establishment and maintenance of the trust, such as potential gift taxes associated with funding the trust, could be significant. You should consult a professional experienced in this area.

Q: My income is tax exempt from Maryland and I customarily do not pay Maryland income tax; however I withdrew an IRA in November 1995 and I now owe Maryland income tax on $31,000. Am I liable for penalties for taxes due which were not withheld and for which no estimated income tax was paid? How could I calculate that?

A: You will not owe an underpayment penalty to Maryland if your fTC 1994 Maryland tax was zero. If you owe a penalty, the state will generally send you an underpayment notice.

The above advice is for general purposes only and is not intended as legal, accounting or tax advice. Specific situations may vary.

Pub Date: 4/08/96

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