How trusts can utilize the 20% QBI deduction

Claiming the QBI deduction for trusts

If you haven’t already, this might be the year to create separate trusts for individual beneficiaries instead of a single trust. While it may make the most sense when children are young, many factors influence the beneficiaries as they age.

Beneficiaries of different ages, family size, risk tolerance for investments and economic status as adults are all reasons why a single trust creates family tension.

The IRS determined that if a trust is divided into subtrusts and each subtrust has a different primary beneficiary, each subtrust will be treated as a separate trust for federal income tax purposes.

How does a trust utilize the 20% QBI deduction?

In case you missed it, we talked more about the qualified business income (QBI) deduction in this earlier blog post.

Sec. 199A creates a QBI deduction for taxpayers other than corporations.

The “combined qualified business income amount” is:

  • The sum of the Sec. 199A(b)(2) amounts plus 20% of the aggregate amount of qualified real estate investment trust dividends and qualified publicly traded partnership income.
  • The Sec. 199A(b)(2) amount is 20% of the QBI for each trade or business if the taxpayer’s taxable income is under the threshold.

Taxable income of a nongrantor trust is determined before the distribution deduction and exemption amount.

The threshold for nongrantor trusts is $157,500, indexed for inflation after 2018.

If you’d like to see how trusts could calculate taxable income, this post from the Tax Advisor offers a few examples.

Over at Morgan & Associates, we’ve studied the tax code overhauls and are ready to help!