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Your Guide to Charitable Remainder Trust Deductions

Your Guide to Charitable Remainder Trust Deductions

April 10, 2023

Making the most of your tax deductions is crucial if you want to keep more money in your pocket – or your charitable remainder trust. These irrevocable trusts have certain responsibilities that you must adhere to, but they also come with many benefits to offset income earned. Charitable remainder trust deductions should be considered when opening this type of account. 

To get a clearer picture of what you or your beneficiaries will be responsible for and how you can save more money with deductions, here is a quick guide to CRT deductions. 

Tax Responsibilities of a Charitable Trust

It is never a good idea to skirt the tax responsibilities set out by the IRS. To this end, there are a few tax responsibilities that are unique to charitable trusts. Here is what you need to know about what is due and how taxes are handled:

  • Ordinary income: This rule applies to charitable remainder trusts where the trust had ordinary income for the current tax year, as well as undistributed ordinary income in the past. When the income is enough to cover all payments, the entire payment will be taxed under this category. It should be reported on the beneficiary’s income with a Schedule K-1.
  • Capital Gains: After ordinary income, payments will be taxed as capital gains when the assets that are included in the trust are sold. Payments made from these sales or dispositions will fall under this category. 
  • Other Income: If you manage to deplete both ordinary income and capital gains, payments are then categorized as other income. Tax-exempt income will also fall into this category.
  • Corpus: Corpus occurs when accumulated income and gains have all been distributed. Payments made at this point would come from the corpus (principal) of the trust and would be tax-exempt. 

Charitable Remainder Trust Deductions

Once you clear the tax responsibilities associated with a charitable remainder trust, you need to know how to make the most of your trust. Tax deductions are an important aspect of a CRT and they can help you to save more on your taxes at the end of the fiscal year. The good news is that there are some great benefits to donating both cash and assets to this type of fund. 

First, let’s take a look at what you can expect with a cash donation. If you fund your CRT with cash instead of assets, you can take a sizable deduction of up to 60% of adjusted gross income. 

On the other hand, one of the benefits of a charitable remainder trust is that you can fund it with assets like real estate. If you include an appreciated asset in your trust, you can deduct up to 30% of your adjusted gross income this year. 

If you find that you have made some of these contributions but cannot use the entire deduction in a given year, it can roll over for up to five years. 

Also, it’s important to note that you can defer capital gains tax when using a CRT. This tax will be deferred until the income is distributed to your named beneficiary. In this way, the taxes that you might have incurred on the sale of a highly-appreciated asset will be more palatable as they are spread out over a number of years instead of hitting all at once upfront. 

How to File Taxes for a Charitable Trust

Charitable remainder trusts are a type of irrevocable trust and you must file annual income tax returns for this separate entity. Fortunately, there is a simple process that you can walk through to file your taxes for a CRT. Let’s take a closer look at what you would need to do. 

Beneficiaries who are receiving income from the trust will need to report that income on their own taxes. Meanwhile, the trust needs to file its own tax forms for any money that has not yet been distributed to beneficiaries. 

The trustee will also need to file Form 1041 to report the income from this account. This form will include all of the details of the gains, losses, deductions, and income for the trust if it earns in excess of $600 of taxable income. 

In order to file, the irrevocable trust will require a federal employer identification number. It is easy to apply for this with just the basic information of name, trust name, and address. With this detail secured, you can move forward with Form 1041 to be filed on or before April 15. If you need more time, you can file for a five-month extension with Form 7004. 

A Schedule K-1 may also be required for distributions paid to beneficiaries. 

Optimize Your Charitable Remainder Trust

Many individuals know that estate planning is crucial, but they feel overwhelmed by all the options. A charitable remainder trust is one way your beneficiaries can have the regular income they need while maximizing tax benefits in the here and now. Magellan Planning Group can help you set up, manage, and maximize tax savings for your charitable remainder trust. 

If you’re considering moving forward with funding a CRT, schedule a consultation with us to learn more about whether this type of arrangement is a good fit for your finances. 

Tax services offered by Magellan Tax, LLC. Legal services offered by Magellan Legal, LLC. Tax and legal services offered separately from Cetera Advisor Networks LLC which does not provide tax or legal advice.