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Tax Law (Questions About Taxes)/Irrevocable trust - expenses from income or capital?

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Question
Hi,

I have just been named the trustee of an irrevocable trust my mother set up for my brother.  The trust is required to distribute all income to my brother.  One of the gifts my mother gave the trust was a house she owned.  This house is not rented and we do not have any plans to rent it.  It is not for sale and we do not have any plans to sell it.  It is just a house that the trust owns.  

There are some expenses associated with the house.  Those are mainly property taxes and utility bills, though there may be others.  My question is, when the trust pays the bills associated with the house, does the money come out of income that the trust receives for other investments or from capital that is not invested?

My guess is that the property taxes would come out of income because I think those can be deducted on form 1041?  But what about other expenses like the utilities or any repair costs?  Would that come out of capital or income?

Thanks for any advice you can offer.

Answer
Fay,

Thanks for your question.  As you may have discovered, there is not much that is "black and white" in the area of trust taxation.

In your case, expenses are paid based on the terms of the trust.  If the trust does not make any specification in this regard, state law applies.

I would remind you that not necessarily all the amounts paid would be deductible for tax purposes.

Hope this helps.

John Stancil, CPA

Tax Law (Questions About Taxes)

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John Stancil, CPA

Expertise

I can answer questions on personal income taxes, partnerships, and some corporate income taxes. I can deal with some state tax questions. Limited gift and estate tax questions. I am also familiar with ministerial and church tax reporting issues. I am Professor Emeritus at Florida Southern College. Sales taxes and property taxes are state and local issues so I am not likely be be able to give you an in depth answer on those types of taxes. I have maintained a CPA practice, specializing in tax, for over 35 years. I am a member of the National Association of Tax Professionals, The Florida Insititute of CPA's, The NCPE Fellowship. In addition I am a Certified Mentor for SCORE. Visit my website at www.mybaldcpa.com. I also offer seminars and consultations to churches and clergy on their tax issues at www.churchtaxsolutions.com Also visit my blog, www.thetaxdocspot.com. I am listed on Tax Connections at https://www.taxconnections.com/profile/John-Stancil/12258973 Prepare and file your own taxes at www.1040stancilcpa.com

Experience

I hold a doctorate in Accounting, and am a CPA. My certifications of CIA, CFM, and CMA are inactive. I passed all certification examinations on the first attempt, and received honorable mention for my scores on the CIA exam. I have operated a CPA firm for over 37 years and have taught accounting and tax at the college level for over 35 years.

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FICPA, NATP, NCPE Fellowship, Lakeland Business Leaders

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The CPA Journal, Florida CPA Today, Green Consumer, Green Business, Global Sustainability as a Business Imperative, Palmetto Review, NATP TaxPro Quarterly, Mustang Journal of Finance and Accounting.

Education/Credentials
DBA University of Memphis MBA University of Georgia BS in Accounting Mars Hill University

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