ExpertMedium1 markMultiple Choice
CPA · Question 58 · Area II: Entity Tax Compliance
A taxpayer is the grantor of a trust. The trust generates $10,000 of income. The trustee retains the income in the trust. Who pays the tax?
A taxpayer is the grantor of a trust. The trust generates $10,000 of income. The trustee retains the income in the trust. Who pays the tax?
Answer options:
A.
The trust.
B.
The taxpayer (grantor).
C.
The beneficiaries.
D.
No one until distributed.
How to approach this question
Identify 'Grantor Trust'. Rule: Grantor pays ALL tax, as if the trust didn't exist.
Full Answer
B.The taxpayer (grantor).✓ Correct
IRC §671. Where the grantor is treated as the owner of any portion of a trust (due to retained powers), the income, deductions, and credits attributable to that portion are included in the grantor's taxable income.
Common mistakes
Thinking the trust pays tax on retained income (true for complex trusts, not grantor trusts).
Practice the full CPA TCP Practice Exam 2
68 questions · hints · full answers · grading
More questions from this exam
Q01In Year 1, an executive receives an Incentive Stock Option (ISO) to purchase 1,000 shares of stoc...MediumQ02A taxpayer is calculating their Alternative Minimum Tax (AMT) liability for Year 1. They claimed ...MediumQ03On January 1, Year 1, a corporation lends $500,000 to a shareholder at a 0% interest rate. The Ap...HardQ04A U.S. citizen accepts a permanent assignment in France on January 1, Year 1. In Year 1, they ear...MediumQ05A 12-year-old child has $5,000 of interest income and no earned income in Year 1. The standard de...Medium