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What's the tax nature of trust distributions

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in Small Business Tax

Q. I am the beneficiary of an irrevocable trust I set up this year. Eventually, the assets will go to my children, but the trust is required to pay out income to me before year-end. Is this amount taxed as ordinary income? D.D.C., Newport Beach, Calif.

A. Not necessarily. Essentially, the income you receive should be treated the same as it would by the trust. For example, if the trust earns dividends and capital gains on mutual-fund investments, the income will be taxable to you as dividends and capital gains, respectively. Both qualified dividends and long-term capital gain are taxed at a maximum federal income tax rate of only 15 percent. It’s the responsibility of the trustee to furnish a K-1 to you defining the type of income the trust has paid. Tip: Generally, you aren’t permitted to deduct a loss attributable to an irrevocable trust.

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