89-77 | Virginia Tax

Tax Type

Fiduciary Income Tax

Description

Estates and trusts subject to the Virginia income tax

Topic

Basis of Tax

Date Issued

02-21-1989

VR 630-5-490 FIDUCIARY ESTIMATED TAX: DEFINITIONS, DECLARATION
VR 630-5-491 FIDUCIARY ESTIMATED TAX: INSTALLMENT PAYMENTS
VR 630-5-492 FIDUCIARY ESTIMATED TAX: ADDITIONS TO THE TAX

EFFECTIVE DATE: February 2, 1989, but retroactive in effect for taxable years beginning on and after January 1, 1988.

EXPIRATION DATE: None.

REFERENCES: §§ 58.1-490, 58.1-491 and 58.1-492 of the Code of Virginia.

AUTHORITY: § 58.1-203 of the Code of Virginia.

SCOPE: Applicable to all estates and trusts subject to the Virginia
income tax.

SUMMARY: These regulations set forth and explain the procedures relating to the new requirements for estates and trusts to make installment payments of estimated tax. The existing provisions relating to installment payments of estimated Virginia income tax by individuals were made applicable to estates and trusts for taxable years beginning on and after January 1, 1988. 1987 Acts c. 484. This followed similar provisions for federal tax purposes in the Tax Reform Act of 1986.

- - - - VR 630-5-490 interprets § 58.1-490 of the Virginia Code and explains when an estate or trust is required to make a declaration of estimated tax. A trust is required to make a declaration if it will have a Virginia income tax liability of more than $150 for the taxable year. An estate is required to make a declaration if it will have a Virginia income tax liability of more than $150 for the taxable year and the taxable year ends more than two years after the date of death of the decedent.
      VR 630-5-491 interprets § 58.1-491 of the Virginia Code and
      - explains when installment payments of estimated tax must be made. In most cases four installment payments must be made.
      VR 630-5-492 interprets § 58.1-492 of the Virginia Code and
      - explains when an addition to the tax is required for underpayment of estimated tax, how to compute the addition, and how to determine if the estate or trust qualifies for an exception to imposition of the addition.

ADOPTION DATE: December 14, 1988.

VR 630-5-490 FIDUCIARY ESTIMATED TAX: DEFINITIONS, DECLARATION

1. Definitions.

The following words and terms, when used in these regulations, shall have the following meaning unless the context clearly indicates otherwise:

"Estimated tax" means the amount which the fiduciary reasonably estimates to be the income tax due for the taxable year, less the amount estimated to be the sum of any credits allowable against the income tax. For this purpose, the refund of an overpayment of income tax which the fiduciary directs to be applied toward the estimated tax for the succeeding taxable year shall be considered an installment payment of estimated tax and not a credit against the income tax.

"Fiduciary" means the person who is required to file federal and Virginia income tax returns for the estate or trust, including the trustee of a trust and the executor or personal representative of an estate.

"Taxable year" means the taxable year of the estate or trust for federal income tax purposes.

§ 2 Declarations of estimated tax.

A. Requirement.

- 1. If the estimated tax is greater than $150, the fiduciary shall make a declaration of estimated tax for

i. any taxable year of an estate which ends two or more
years after the date of death of the decedent; and
ii. every taxable year of a trust.

2. Examples.

- a. Decedent A died on September 1, 1986. For the taxable year 1988 the executor of A's estate expects to receive $10,000 income which will not be used to meet administrative expenses or distributed to the beneficiaries. The executor must file a declaration because the fiduciary income tax due on $10,000 will exceed $150 and the end of the taxable year, December 31, 1988, is more than two years after the date of death of the decedent.

- b. The ABC trust expects to receive $10,000 income in 1988 but under the terms of the trust instrument the trustee is required to distribute all income to the beneficiaries. No declaration is required because the trustee's fiduciary income tax liability will be zero.

- c. Same facts as in example b. except that the beneficiaries are minors. The trustee may accumulate income during the minority of the beneficiaries, and anticipates doing so. The trustee must file a declaration because the trustee's fiduciary income tax on $10,000 will exceed $150.

B. Contents.

The declaration shall state the amount which the fiduciary reasonably estimates is the income tax for which the estate or trust will be liable for the taxable year.

C. Time for filing.

- 1. If the requirements of subsection A. are met on or before April 15, then the fiduciary shall file the declaration on or before May 1 of the taxable year.

- 2. If the requirements of subsection A. are met for the first time after April 15 and before June 2, then the fiduciary shall file the declaration on or before June 15 of the taxable year.

- 3. If the requirements of subsection A. are met for the first time after June 1 and before September 2, then the fiduciary shall file the declaration on or before September 15 of the taxable year.

- 4. If the requirements of subsection A. are met for the first time after September 1 of the taxable year, then the fiduciary shall file the declaration on or before January 15 of the succeeding year.

- 5. If the estate or trust has a taxable year other than a calendar year then the declaration shall be due on the fifteenth day of the fourth, sixth, or ninth month of the taxable year or on the fifteenth day of the first month of the succeeding taxable year, as appropriate.

6. Examples.

- - - a. On April 15, 1988, the fiduciary of the ABC trust expects to receive $25,000 income in 1988. Under the terms of the trust instrument the fiduciary is required to distribute all income to adult beneficiaries, but may accumulate the income of a minor beneficiary. There are two adult beneficiaries and no minor beneficiaries. No declaration is required because the trust's estimated tax liability is zero.

- - - b. Same facts as in example a. except that as a result of the death of one of the beneficiaries on August 1, 1988, a minor has become a beneficiary and the fiduciary anticipates accumulating the income of the minor. The minor's share of income for the remaining five months of the taxable year will be 1/2 of 5/12 of $25,000 or $5,208. The trust's estimated tax on $5,208 is more than $150, therefore a declaration must be filed on or before September 15, 1988.

D. Amendments.
A fiduciary may amend a declaration at any time throughout the year by increasing or decreasing the amount of any installment payment of estimated tax and reporting the changed amount on the payment-voucher form accompanying the installment payment.

E. Return as declaration or payment.
1. If on or before March 1 of the succeeding taxable year a fiduciary files the return for the estate or trust for the taxable year for which a declaration is required under subsection A., and pays the full amount of the tax shown to be due on the return:

i. such return shall be considered as the declaration if no declaration was required to be filed during the taxable year, but is otherwise required to be filed on or before January 15; and
ii. such return and payment shall be considered as the last installment payment of estimated tax which would otherwise have been payable on or before January 15.

2. Filing a return on or before March 1 of the succeeding taxable year or filing a declaration or payment of the last installment on January 15 will not relieve a taxpayer of liability for additions to tax for underpayment of any of the installments of estimated tax that were due on May 1, June 15, or September 15 of the taxable year.

F. Short taxable year.
1. A declaration must be filed if a return is required for a period of less than twelve months, unless the short period is less than four months or if the requirements of subsection A. are first met after the first day of the last month in the short taxable period.

2. For the purpose of determining whether the estimated tax exceeds $150, the estimated tax for the short taxable period shall be placed on an annual basis by multiplying the estimated tax for the short taxable period by 12 and dividing the result by the number of months in the short taxable period.

VR 630-5-491 FIDUCIARY ESTIMATED TAX: INSTALLMENT PAYMENTS

§ 1. Due dates and amounts.

The estimated tax shown on the declaration shall be paid in equal installments as follows:

A. If the declaration is filed on or before May 1 of the taxable year, the estimated tax shall be paid in four equal installments. The first installment shall be paid at the time the declaration is filed and the second, third and fourth installments shall be paid on the following June 15, September 15, and January 15, respectively.

B. If the declaration is not required to be filed on or before May 1 of the taxable year, and is filed after May 1 but on or before June 15 of the taxable year, the estimated tax shall be paid in three equal installments. The first installment shall be paid at the time the declaration is filed and the second and third installments shall be paid on the following September 15 and January 15, respectively.

C. If the declaration is not required to be filed on or before June 15 of the taxable year, and is filed after June 15 but on or before September 15 of the taxable year, the estimated tax shall be paid in two equal installments. The first installment shall be paid at the time the declaration is filed and the second installment shall be paid on the following January 15.

D. If the declaration is not required to be filed on or before September 15 of the taxable year, and is filed after September 15, the estimated tax shall be paid in full at the time the declaration is filed.

E. If the declaration is filed after the due date, including cases where an extension of time has been granted, subsections 1.B, 1.C, and 1.D shall not apply. All installments of estimated tax which would have been due if the declaration had been timely filed shall be paid at or before the time of filing. The remaining installments shall be paid when, and in the amounts which, they would have been payable if the declaration had been filed when due.

F. Examples.

- 1. On April 15, 1988, the fiduciary of the ABC trust expects to receive $50,000 income in 1988. Under the terms of the trust instrument the fiduciary is required to distribute all income to adult beneficiaries, but may accumulate the income of a minor beneficiary. There are two beneficiaries, both of whom are adults. No declaration or payment is required on May 1, 1988, because the trust's estimated tax liability is zero. However, as a result of the death of one of the beneficiaries on August 1, 1988, a minor has become a beneficiary and the fiduciary anticipates accumulating the income of the minor. The minor's share of income for the remaining five months of the taxable year will be 1/2 of 5/12 of $50,000 or $10,417.

- The trust's estimated tax on $10,417 is $391 for the taxable year which must be paid in installments, one-half on or before September 15, 1988, and the remaining half on or before January 15, 1989.

2. On April 15, 1988, the fiduciary of Trust DEF expected its estimated tax for 1988 to be $500. Therefore a declaration and an installment payment of $125 were due on May 1, 1988, but were not made. The omission is discovered on September 1, 1988. The first three installments totaling $375 are due on or before September 15, 1988. The remaining installment of $125 is due on or before January 15, 1989.

3. Same facts as in example 2. except that due to a change in circumstances the fiduciary discovers on August 31 that the estimated tax for 1988 should be $2,000 instead of $500. The
first three installments totaling $1,500 are due on or before September 15, -1988, and the remaining installment of $500 is due on or before January 15, 1989.

§ 2. Amendments of declaration.

If any amendment of a declaration is filed, the remaining installments, if any, shall be ratably increased or decreased (as the case may be) to reflect any increase or decrease in the estimated tax by reason of such amendment. If any amendment is made after September 15 of the taxable year, any increase in the estimated tax by reason thereof shall be paid at the time of making such amendment.

§ 3. Application to short taxable year.

A. In the case of a short taxable year of an estate or trust for which a declaration is required to be filed the estimated tax shall be paid in equal installments, one at the time of filing the declaration, one on the 15th day of the sixth month of the taxable year and another on the 15th day of the ninth month of such year unless the short taxable year closed during or prior to such sixth or ninth month, and one on the 15th day of the first month of the succeeding taxable year.

B. The provisions of subsection 1.E relating to payment of estimated tax in any case in which the declaration is filed after the due date, shall also apply to the payment of the estimated tax for short taxable years.

C. For example, if the short taxable year is the period of 10 months from March 1, 1988 to December 31, 1988, and the declaration is required to be filed on or before June 15, 1988 (the fifteenth day of the fourth month), the estimated tax is payable in four equal installments on June 15 with the declaration, August 15, 1988, November 15, 1988 and January 15, 1989.

§ 4. Fiscal year.

If the estate or trust has a taxable year other than a calendar year then the payments shall be due on the fifteenth day of the fourth, sixth, or ninth month of the taxable year or on the fifteenth day of the first month of the succeeding taxable year, as appropriate.

§ 5. Installments or entire estimated tax paid in advance.

A fiduciary may elect to pay any installment of the estimated tax before the date prescribed for its payment. A fiduciary may also elect to file a declaration of estimated tax in the closing days of a calendar year for the taxable year about to begin, and may pay in full the amount of the estimated tax for such taxable year at the time the declaration is filed.

§ 6. Application of Payments.

A. All payments of estimated tax shall be applied toward the income tax liability of the estate or trust for the taxable year. Payments of estimated tax may not be applied toward any other tax or taxable year unless and until an income tax return is filed claiming a refund. In extraordinary circumstances where the fiduciary is not required to file a Virginia income tax return the fiduciary may request a refund of estimated tax.

B. Payments of estimated tax may not be applied toward the income or estimated tax liability of a beneficiary of an estate or trust even if the fiduciary distributes all or a portion of the distributable net income to the beneficiary after making installment payments of estimated tax.

C. Example: For the calendar year 1988 the trustee anticipates earning $50,000 income after expenses. The terms of the trust require the trustee to pay $10,000 annually to the beneficiary and accumulate the balance of the income; however, the trustee is permitted to pay additional sums to the beneficiary if required for the beneficiary's support. Initially, the trustee anticipates that 1988 taxable income will be $40,000 after the distribution deduction and makes installment payments of estimated tax in the amount of $407 on May 1, 1988, June 15, 1988, and September 15, 1988. In December the trustee finds it necessary to distribute an additional $25,000 for the beneficiary's support. The trustee makes no installment payment on January 15, 1989.

- 1. The trust will have taxable income of $15,000 after the distribution deduction on which a tax of $620 will be due. Since the estimated tax payments total $1,221, the trust will be entitled to a refund of $601.

- 2. No part of the trust's estimated tax payments may be transferred to the account of the beneficiary even though $25,000 of income was distributed to the beneficiary after the trustee had paid estimated tax on it.

§ 7. Credit against estimated tax liability.

If the annual income tax return shows that the estate or trust is entitled to a refund of income tax by reason of overestimating and overpaying estimated tax the fiduciary may elect to have all or a portion of such refund applied to the payment of estimated tax liability for the following taxable year.

VR 630-5-492 FIDUCIARY ESTIMATED TAX: ADDITIONS TO THE TAX

§ 1. Additions to the tax.

A. In the case of an underpayment of any installment of estimated tax by an estate or trust, except as provided in section 4, there shall be added to the income tax for the taxable year an amount determined at the underpayment rate established for interest under § 58.1-15 of the Code of Virginia, upon the amount of the underpayment (determined under section 2), for the period of the underpayment (determined under section 3). The amount of such addition to the tax shall be reported and paid at the time of filing the fiduciary income tax return for the taxable year.

B. For the purpose of computing the addition with respect to an underpayment of the final installment, the underpayment rate which applies to the third month following the end of the taxable year shall apply until the due date of the income tax return. For example, in the case of an estate or trust on a calendar year reporting for 1988, the underpayment rate in effect for the month of March, 1989, will apply through May 1, 1989, in computing the addition to the tax.

§ 2. Amount of underpayment.

For the purpose of section 1, the amount of the underpayment shall be the excess of:

A. The amount of the installment which would be required to be paid if the estimated tax were equal to 90% of the income tax, whether or not the fiduciary filed a return for such taxable year, over

B. The amount, if any, of the installment paid on or before the last date prescribed for such payment.

§ 3. Period of underpayment.

The period of the underpayment shall run from the date the installment was required to be paid to the earlier of the following dates:

A. May 1, if a calendar year, or the 15th day of the fourth month following the close of the taxable year, if a fiscal year, or

B. With respect to any portion of the underpayment, the date on which such portion is paid. For purposes of this paragraph, a payment of estimated tax on any installment date shall be considered a payment of any previous underpayment only to the extent such payment exceeds the amount of the installment determined under subsection 2.A for such installment date.

C. Example: The principles of sections 1, 2, and 3 may be illustrated by the following: On or before May 1, 1988, the trustee of The Jones Trust could reasonably expect the fiduciary's Virginia tax liability for calendar year 1988 to exceed $150. Therefore the trustee timely makes four installment payments: $1,500 on May 1, 1988, and June 15, 1988, and $2,000 on September 15, 1988, and January 15, 1989. When the fiduciary income tax return is filed on May 1, 1989, the tax liability is $10,000. The total paid ($7,000) is less than 90% of the tax ($9,000). Therefore, an addition to the tax in the amount of $174.56 is due, computed as follows:

INSTALLMENT 1st 2nd 3rd 4th

AMOUNT OF UNDERPAYMENT
90% of the tax = 4 2,250.00 2,250.00 2,250.00 2,250.00
Actual Payment 1,500.00 1,500.00 2,000.00 2,000.00
Underpayment 750.00 750.00 250.00 250.00

PERIOD OF UNDERPAYMENT
Date due 5/1/88 6/15/88 9/15/88 1/15/89
Date Paid 5/1/89 5/1/89 5/1/89 5/1/89
No. of days (total) 365 320 228 106
No. of days underpayment is
subject to each rate.
4/1/88 - 6/30/88 at 10% 60 15 0 0
7/1/88 - 9/30/88 at 10% 92 92 15 0
10/1/88 - 12/31/88 at 11% 92 92 92 0
1/1/89 - 5/1/89 at 11% 121 121 121 106

ADDITION TO THE TAX
4/1/88 - 6/30/88 at 10% 12.33 3.08 0.00 0.00
7/1/88 - 9/30/88 at 10% 18.90 18.90 1.03 0.00
10/1/88 - 12/31/88 at 11% 20.79 20.79 6.93 0.00
1/1/89 - 5/1/89 at 11% 27.35 27.35 9.12 7.99
Total addition = $174.56 79.37 70.12 17.08 7.99

§ 4. Exceptions.

A. Notwithstanding the provisions of the preceding sections 1, 2, and 3, the addition to the tax shall not be imposed if the income tax for the taxable year is less than $150.

B. Notwithstanding the provisions of the preceding sections 1, 2, and 3, the addition to the tax with respect to an underpayment of any installment shall not be imposed if the total payments of estimated tax made on or before the last date prescribed for the payment of such installment equals or exceeds the amount which would have been required to be paid on or before such date if the estimated tax were any of the following:

1. The tax shown on the return of the estate or trust for the preceding taxable year, if a return showing a liability for tax was filed for the preceding taxable year and such preceding year was a taxable year of 12 months.

2. An amount equal to the tax computed, at the rates applicable to the taxable year, on the basis of the facts shown on the return for, and the law applicable to, the preceding taxable year.

3. An amount equal to 90% of the tax for the taxable year computed by placing on an annualized basis the taxable income for the months in the taxable year ending before the month in which the installment is required to be paid. Credits shall not be taken into account when computing the tax on annualized income. For purposes of this paragraph the taxable income shall be placed on an annualized basis by:

- a. multiplying by 12 (or, in the case of a taxable year of less than 12 months, the number of months in the taxable year) the taxable income for the months in the taxable year ending before the month in which the installment is required to be paid, and

- b. dividing the resulting amount by the number of months in the taxable year ending before the month in which such installment date falls.

4. An amount equal to 90% of the tax computed, at the rates applicable to the taxable year, on the basis of the actual taxable income for the months in the taxable year ending before the month in which the installment is required to be paid. The periods involved, for a calendar year taxpayer, are January 1 to April 30, January 1 to May 31, and January 1 to August 31. Virginia taxable income for the applicable period is computed in accordance with § 58.1-361 of the Code of Virginia for the four, five or eight month period, as applicable. Credits shall not be taken into account when computing the tax under this paragraph.

C. If a fiduciary has any discretion in distributing or accumulating distributable net income, then for the purposes of the computations under paragraph 4.B.3 (tax on annualized income) and 4.B.4 (tax on 4, 5, and 8 month period) the income of the trust as of any date shall be reduced by distributions to a beneficiary actually made on or before such date which the fiduciary reasonably expects to be treated as made from distributable net income.

D. If an estate or trust was required to change its taxable year during 1987 to a taxable year ending on December 31, then the estate or trust may qualify for the "prior year alternative" exception in paragraph 4.B.1 under the following conditions:

- 1. The preceding taxable year was a short taxable year in 1987; and
  2. The short taxable year was preceded by a taxable year of 12 months; and
  3. The tax shown on the return for the preceding short taxable year is annualized by dividing it by the number of months in the short taxable year and multiplying the result by 12.

E. Examples.

- On or before May 1, 1988, the trustee of The Jones Trust could reasonably expect the fiduciary's Virginia tax liability for calendar year 1988 to exceed $150. Therefore the trustee timely made four installment payments: $1,500 on May 1, 1988, and June 15, 1988, and $2,000 on September 15, 1988, and January 15, 1989. When the fiduciary income tax return was filed on May 1, 1989, the tax liability was $10,000. Although the $7,000 estimated tax paid is less than 90% of the income tax, an addition to the tax is not required because the trust qualifies for one or more of the exceptions for each installment.

- 1. The tax for the prior year was $6,670. The trust would qualify for the first exception (prior year's tax) with respect to the fourth installment as follows:

INSTALLMENT 1st 2nd 3rd 4th
DUE DATE 5/1/88 6/15/88 9/15/88 1/15/89
Payment 1,500.00 1,500.00 2,000.00 2,000.00
Total paid through each
installment date 1,500.00 3,000.00 5,000.00 7,000.00
Prior year's tax applicable
to each installment 1,667.50 3,335.00 5,002.50 6,670.00
Qualifies for exception? NO NO NO YES

- 2. The $6,670 tax for 1987 was based on taxable income of $120,085. The tax on $120,085 at 1988 rates would be $6,662. The trust would qualify for the second exception (prior year's income at current rates) with respect to the

third and fourth installments as follows:

INSTALLMENT 1st 2nd 3rd 4th
DUE DATE 5/1/88 6/15/88 9/15/88 1/15/89
Payment 1,500.00 1,500.00 2,000.00 2,000.00
Total paid through each
installment date 1,500.00 3,000.00 5,000.00 7,000.00
Applicable tax on prior year's
income at current rates 1,665.00 3,331.00 4,996.50 6,662.00
Qualifies for exception? NO NO YES YES

3. The 1988 tax of $10,000 is based on taxable income of $178,130. After reviewing the records of income, expenses and distributions, the trustee determines that the taxable income is $40,000 as of April 30, 1988, $55,000 as of May 31, 1988, and $115,000 as of August 31, 1988. The trust qualifies for the third exception (annualized income) with respect to the first installment. (Note that this exception cannot be used to avoid the addition for fourth installment.)

INSTALLMENT 1st 2nd 3rd
DUE DATE 5/1/88 6/15/88 9/15/88
Payment 1,500.00 1,500.00 2,000.00
Applicable dates 4/30/88 5/31/88 8/31/88
Income through date $40,000.00 $55,000.00 $115,000.00
Annualization factor 3 (124) 2.4 (125) 1.5 (128)
Annualized income 120,000.00 132,000.00 172,500.00
Tax on annualized income 6,657.50 7,345.50 9,676.25
Installment percentage 25% 50% 75%
90% of installment percentage 22.5% 45% 67.5%
Amount required through due date 1,497.94 3,306.38 6,531.47
Actual payments through due date 1,500.00 3,000.00 5,000.00
Qualifies for exception? YES NO NO

4. The trust qualifies for the fourth exception (tax on income over a 4, 5, and 8 month period) with respect to the second installment. (Note that this exception cannot be used to avoid the addition for the fourth installment.)

INSTALLMENT 1st 2nd 3rd
DUE DATE 5/1/88 6/15/88 9/15/88
Payment 1,500.00 1,500.00 2,000.00
Applicable dates 4/30/88 5/31/88 8/31/88
Income through date $40,000.00 $55,000.00 $115,000.00
Tax on income for period 2,057.50 2,920.00 6,370.00
Amount required through due date 2,057.50 2,920.00 6,370.00
Actual payments through due date 1,500.00 3,000.00 5,000.00
Qualifies for exception? NO YES NO

Rulings of the Tax Commissioner