Simple Trust: Are dividends and capital gains taxed as ordinary income?

I am filling out form 1041 for a simple trust (which only contains 3 mutual funds).

This year, there were approximately $1500 in dividends and $4500 in capital gains.

Using the form, it looks like everything is being taxed as ordinary income (vs. 15% max capital gains rate).

Is this correct?


Also, if the trust were to be dissolved and mutual funds transferred to person who trust was set up for (without selling any mutual funds), would the IRS still view this as a sale and repurchase and expect taxes based on those "sales" next year?

Michael, I had the same question with respect to form 1040, and the answer is beyond Schedule D. The IRS downloadable forms now download the form separately from the instructions. You are correct, Schedule D gives no indication of what you should do with the numbers you calculate. I am not a tax professional, but I went to the last page of the Schedule D instructions http://www.irs.gov/pub/irs-pdf/i1040sd.p... and found the Schedule D tax worksheet. This is where it starts to break down your ordinary income from dividends and capital gains and losses. It may or may not be applicable to form 1041 that you are filling out, but there will probably be another worksheet that you can use. I, like you, saw that the form 1040 was simply calculating the sum of ordinary income as well as dividends and capital gains. By the time you finish the worksheet, I believe you will then see how they are being calculated differently and where you should put those numbers.

Since this is a simple trust the dividends should be taxed to the beneficiary on Schedule K-1 and the trust takes a distribution deduction. If they are qualified dividends they retain that character. The capital gains are taxed to the trust - at 15% if long term. A trust termination is not a deemed sale so no gains would be created.

no -

dividends and long term capital gains are taxed at lower rates

the trust should not affect tax status

see irs.gov or turbo tax