It’s Not Too Late to Reduce Trust Taxes Through Last-Minute Distributions

If you are the trustee of a trust that generated income in 2013, you may be looking at a hefty tax bill this filing season.  With the new marginal income tax rates for 2013, the increased capital gains rates, and the 3.8% tax on net investment income, it is more important than ever to actively manage a trust’s tax exposure. As a Philadelphia tax lawyer licensed to practice in multiple states, I understand the importance of this issue.

Because trusts are subject to compressed income tax rates, the increased tax rates can kick in at relatively low levels, compared to individual taxpayers.  The highest marginal income tax rate of 39.6 for an individual applies only to income in excess of $400,000.  On the other hand, trust income is subject to the 39.6% rate after it reaches only $11,950 (for 2013).  Trust income over that threshold is also subject to the 20% tax on dividends and capital gains and the 3.8% surtax on investment income.

A trust’s high tax rates can usually be avoided by distributing income out to the beneficiaries.  The distributed income is then taxed as income to the recipient beneficiary, rather than to the trust.  For example, assume a trust holding $500,000 of assets generated a 5% return in 2013, all in interest income.  The trust would have $25,000 in taxable income.  If the trust retains all the income, the tax bill would be about $8,750.  If, instead, the trust distributed all of the income to a beneficiary who was subject to a 25% marginal income tax rate, the trust would pay no tax on the income, and the beneficiary would pay tax of $6,250.  Simply shifting the income to the beneficiary creates a tax savings of $2,500.  It may be possible to reduce the tax even further by retaining some of the income in the trust and distributing the rest.

A special rule allows a trustee to take advantage of this strategy even when distributions have not been made in the year for which the tax return is filed.  By making a special election on the trust’s tax return, the trustee can treat distributions made within 65 days of the end of the calendar year as made in the prior year.  This means trustees have until March 6, 2014 to make distributions that will reduce the trust’s 2013 tax liability.

Shannon McNulty to Present at Business Tax Planning Guide Seminar

Shannon will be presenting at the National Business Institute CLE seminar on December 9, 2013.

Payroll/Benefits: Tax Implications

10:45 – 11:30, Shannon P. McNulty

  1. Payroll Tax
  2. Benefit Plans
  3. Retirement Funds

Credit Information

Continuing Legal Education

  • NJ CLE – 8.00
  • PA CLE – 6.50

CPE for Accountants

  • CPE for Accountants/NASBA – 8.00


Monday, December 09, 2013


8:30 AM – 4:40 PM


Hilton Garden Inn Philadelphia City Center
1100 Arch Street
Philadelphia, PA 19107

Register Here:

More Details:

What’s a Pennsylvania Benefit Corporation?

A Benefit Corporation – also known as a B Corporation – is a new business model that has emerged out of a growing interest in promoting socially responsible businesses.  The B Corporation represents an attempt by several states to promote socially-responsible businesses create transparency for companies claiming to have a positive public impact. This has wide-ranging implications for a variety of issues in Philadelphia, including charitable planning and community involvement.

Continue reading

How the Government Shutdown Affects Your Taxes

With the failure of congress to pass an appropriations bill, you may be wondering how the government shutdown affects the IRS and your tax obligations.  Unfortunately, the shutdown is not good news for taxpayers or their tax attorneys.  While we still have to pay all our taxes, no refunds will be issued until the government reopens. Electronic submissions and payments continue to be processed, and mailed documents will be accepted.  So if you obtained an extension on filing your 2013 tax return, it still must be mailed or electronically submitted by October 15.  With respect to businesses, payroll deadlines continue to be in effect.

Continue reading

Pennsylvania Legislature Enacts Inheritance Tax Exemption for Family-Owned Businesses

Older Business OwnersFor family businesses in Pennsylvania, the state’s Inheritance Tax has long caused significant distress among those planning to transfer their business to the next generation.  With rates of up to 15%, the tax can spell ruin for many family businesses when the owner passes away.  In order to help family businesses survive, the Pennsylvania legislature recently provided some welcome relief from the tax for certain “qualified family-owned businesses” (QFOBs).  Business attorneys in Philadelphia and throughout the state should take notice to provide immediate assistance for their clients going through

Continue reading

Tax-Saving Tips on Estate Planning for Retirement Accounts

Funds held in a tax-advantaged account often represent a large part of an individual’s net worth.  Because of special tax rules, such accounts must be carefully considered and analyzed as part of any comprehensive estate plan.

Individuals with a traditional IRA or a 401(k) account (“tax-deferred accounts”) must start taking “Required Minimum Distributions” (RMDs) at the age of 70 1/2.  When someone receives a distribution from one of these accounts, the distribution is taxed as ordinary income, subject to his or her individual tax rate (as long as there is no penalty for an early distribution).  On the other hand, because contributions to Roth IRAs are made after taxes, distributions from Roth IRAs are tax-free.  There are no minimum distributions for Roth IRAs.

Continue reading

Estate Planning Tips for Parents with Young Children

If you are the parent of young children, your most important responsibility is providing for their safety and well-being. Equally important is making sure that they are taken care of if the unthinkable happens and you’re no longer around to care for them yourself. Yet, many parents fail to plan for this possibility or implement an inadequate estate plan.  Below are some steps you can take to ensure that your children would be taken care of and that your assets wouldn’t be wasted on taxes or burdensome court procedures compiled by our Philadelphia estate lawyers.

Continue reading

IRS Recognizes All Same Sex Marriages

On August 29, the Treasury Department announced that it would recognize all same-sex marriages that were legally recognized by the jurisdiction in which the ceremony was performed, even if the couple now resides in a state in which their marriage is not recognized.  The announcement answered lingering questions for tax lawyers and couples alike in the wake of the Supreme Court ruling United States v. Windsor about how the IRS would treat same-sex couples who were legally married in one state but reside in a state that does not recognize the marriage.  The ruling will establish equal treatment with respect to federal taxation for all married couples, regardless of whether they are gay or straight and regardless of the state in which they reside. Continue reading

What’s in Store for the Charitable Deduction?

With the push for tax reform in the national spotlight, tax deductions of all kinds are on the chopping block, among them the income tax deduction for charitable donations.  This New York Times blog speculates on the future of the charitable deduction and discusses its effect on charitable giving.

The Obama administration is pushing to limit the value of charitable deductions for high-income taxpayers to 28%.  Under this proposal, the amount of your charitable deduction would be limited if you are subject to a marginal tax rate higher than 28%.  For example, suppose you donate $10,000 to charity and you fall into the 39.6% marginal income tax bracket.  Currently, your donation would offset your income dollar for dollar, such that you would pay no tax on the amount of your income that was donated, resulting in a $3,960 reduction in your tax bill.  Under the proposed rule, your tax savings from the donation would be worth only $2,800.  It is unknown whether this proposal will be enacted in the near future; however, lawmakers are hard-pressed to come up with additional tax revenue in the current fiscal climate.

What does all this talk about the charitable deduction mean for you?  Tax reform is likely to make the charitable deduction rules less generous to taxpayers in the future.  If you are contemplating a substantial gift in the near future, it may be a good idea to make the gift this year before any changes take place.  Better  yet, consult with a tax advisor who can help you structure your finances in a way that minimizes your taxes.

How Retiring Business Owners Can Benefit from Charitable Remainder Trusts

If you’re a business owner looking to sell your business and retire, may incur substantial capital gains tax on the sale of your company stock.  If you want to eliminate these taxes and benefit your favorite charity, a Charitable Remainder Trust (CRT) could be the perfect retirement planning tool for you.  A CRT allows you to convert the value of your business to lifetime income, eliminate capital gains taxes, and contribute to your favorite charity – all through one structure.

Continue reading