For tax year 2004 the Division of Taxation revised its position on the reporting of taxable income from a grantor trust, changing the reporting requirement to be the same as that of a beneficiary. The grantor was to net all income from the trust, regardless of its character, and report the result in the category net income from estates and trusts on the grantor’s tax return.
The Division’s prior position was that income from a grantor trust retained its character, as reflected on the trust’s NJ-1041, and was reportable by the grantor in the appropriate categories on the grantor’s tax return.
A grantor trust is different than other trusts and has unique income reporting requirements. Income and deductions of a grantor trust are taxed to or reportable by the grantor even though the grantor does not receive the trust income. A grantor trust is a legal entity created under state law that is not recognized as a separate tax entity for income tax purposes because the grantor or other substantial owners retain certain powers over or interests in the trust. A grantor is generally the person who sets up the trust.
Clearly a grantor is not the same as a beneficiary and as such is treated differently for federal income tax purposes and for the same reasons should be treated differently for New Jersey Gross Income Tax purposes. Therefore, the Division is reinstating its previous position on the reporting of income from a grantor trust by a grantor.
For tax year 2005 and forward, income from a grantor trust retains its character and is reportable on the grantor’s tax return in the appropriate categories of income.
For tax year 2004 only, for taxpayer convenience and to avoid the filing of amended returns with no real tax impact, the Division will accept the reporting of income from a grantor trust by a grantor under either position.
Should you have questions or require additional information on this issue please contact the Division of Taxation’s Individual Tax Audit Branch at PO Box 288, Trenton, New Jersey 08695.