Can a state tax business or rental income earned by an out-of-state trust?

Income source can create a state tax connection

Business income and rent tied to property in a state may remain taxable there even when a trust is administered elsewhere. Colorado practitioners describe Colorado-source business income and income from Colorado property as potentially taxable to a trust not administered in Colorado. California practitioners say California-source income remains taxable regardless of where fiduciaries and beneficiaries reside. For a trust holding rental property outside its administration state, the property's location can matter to the income tax analysis.

Resident status affects income taxed

A trust's resident status can affect which undistributed income a state taxes. Practitioners explain that resident trusts are taxed on undistributed income, while nonresident trusts are taxed only on undistributed income sourced to the state. California practitioners describe taxation of all California-source income plus a portion of other income based on fiduciary and noncontingent beneficiary residence. A Nevada situs alone does not eliminate another state's income tax, according to practitioners.

Beneficiary and fiduciary residence can affect allocation

California's treatment of retained income can depend on resident fiduciaries and noncontingent beneficiaries. Mixed-residency arrangements require allocation under Schedule G, according to practitioners. A California court upheld the Franchise Tax Board's position that California-source income remained taxable regardless of fiduciary or beneficiary residence. California-source income and other retained income therefore follow distinct descriptions in the California commentary.

Business income may receive different treatment from investments

Minnesota practitioners describe a distinction between investment income and business income. Interest, dividends, and capital gains were not taxable by Minnesota, while S corporation flow-through income remained taxable on an apportioned basis. Nevada practitioners state that income specifically sourced to another state would remain taxable to that state. The Nevada practitioners also describe distributions of nonsourced income to a grantor as likely taxable in the grantor's state of residence. Owners of pass-through businesses can therefore face a different state tax treatment for business income than for investment income, depending on the state rules described here.

Thresholds and rates change. Check the state's own current figures.