Income earned on assets held in a revocable living trust is reported and taxed as if it was earned directly by the settlor of the trust. The Internal Revenue Service (IRS) considers a living trust that is revocable, or in which the settlor retains interest in or power over the assets, to be a "grantor trust." The trust is not a separate tax entity and does not file its own return.
Report interest. Income earned on a living trust through taxable interest should be reported on Line 8a with your other earned interest; tax-exempt interest on Line 8b. Tax-exempt interest is usually that earned on municipal bonds or certain mutual funds. Do not include interest earned on an IRA or other retirement or Medicare account.
Report dividends. Use Line 9a to report ordinary dividends, including those earned on assets held in a living trust. Qualified dividends, which meet certain holding duration requirements (60 days for common stock and 90 days for preferred), are reported on Line 9b.
Report capital gains. If the income earned in the trust was through the sale of stocks or other property, it most likely reflects a capital gain. This sort of income should be reported on Line 13 of Form 1040, and included on Schedule D as either long- or short-term (asset held more or less than one year).
Report real estate and other income. It is not uncommon for a living trust to hold income producing assets, such as rental properties or intellectual property earning royalties. This income, as well as that gained through a partnership or S corporation, are recorded on Schedule E and reported on Line 17 of Form 1040. If you received funds as a beneficiary of another trust, these are also recorded on Schedule E and Line 17.