Series 65

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Taxation Issues - Corporate and Trust Income Tax


Corporate Income Taxes
Corporations get a tax break for investing in common and preferred stocks (of companies other than their own).

  • There is a dividend exclusion of 70% that applies to corporations that own less than 20% of the other company. (In order words, 70% of dividends received from another corporation are tax-free.)

  • If the company owns more than 20%, the dividend exclusion is 80%.

  • Since there is no corporate tax break on bond interest (for corporate or government bonds), there is no incentive for corporations to purchase these. However, there is an incentive for corporations to purchase stocks because of the dividend exclusion.

  • Of course, municipal bond interest is not taxable to the corporation (unless it is a private-purpose bond, which would be taxable to an individual as well).

Trust Income Taxes
The income tax rate that applies to a trust depends on what type of trust it is:

  • Revocable trusts - these trusts manage assets that the owner ("grantor") has placed in the trust during his or her own lifetime.

    • The grantor has the right to change or terminate the trust at any time and can serve as the trustee of the trust.

    • The trust becomes irrevocable upon the grantor's death.

    • Revocable trusts are taxed at the grantor's personal income tax rate - currently a maximum of 35%.

  • Irrevocable trusts - these trusts may be created during the grantor's lifetime or may be contained within a will and become active only upon their death.
    • Unlike revocable trusts, the grantor is unable to make changes without the permission of the beneficiary.

    • Irrevocable trusts are taxed at special trust income tax rates.

    • In 2007, the maximum rate is 35%, but since the income brackets are smaller, this rate is applied to a larger amount of income.

    • For example, a single individual will have a tax rate of 35% applied to taxable income in excess of $349,700 while the special trust tax rate of 35% is applied to taxable income in excess of $10,450. As a result, there is a distinct tax disadvantage to placing income-producing assets into an irrevocable trust.


Estate and Gift Taxes
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