Question

For income tax purposes, how is income earned by a grantor trust taxed? It is taxed:

a)At trust and estate rates.
b)At the individual rate.
c)Only after lifetime income exceeds the lifetime exemption.
d)Only after the death of the grantor.

Answer 1

Income earned by a grantor trust is taxed at the grantor's individual income tax rate, as if the trust's assets are directly owned by the grantor.

Step-by-step explanation:

For income tax purposes, the income earned by a grantor trust is taxed at the individual rate of the grantor. This means that rather than being subject to separate trust and estate rates, which can be higher, the trust's income is reported on the grantor's personal income tax return. The grantor trust rules essentially ignore the separate entity of the trust for income tax purposes and treat the grantor as the owner of the trust's assets, meaning all items of income, deduction, and credit are reported on the grantor's tax return as if the trust does not exist.