The Department of Revenue receives many North Carolina grantor trusts income tax returns every year. In general, a grantor trust tax return is ignored for federal tax purposes and all of the income, deductions, and credits are treated as belonging directly to the grantor (or other person who is taxable on the trust income) and are not reported by the trust on the federal estates and trusts return, Form 1041. Pursuant to Federal Regulation 1.671.4, a separate statement must be attached to Form 1041 stating the name, taxpayer identification number, and address of the person to whom the income is taxable and setting forth the income, deductions, and credits.
Because there are no dollar amounts shown on federal Form 1041, there is no financial information to report on the North Carolina Estates and Trusts Income Tax Return, Form D-407. Only the entity information and the name, address, and identification number of the grantor is shown on the return. Any income, deductions, and credits from the trust will be reported on the grantor's individual federal return and, therefore, will be included in federal taxable income on the grantor's individual State return. Because the grantor trust information provided on Form D-407 is of limited value to the Department and we have access to the federal information, the Department no longer requires State grantor trust tax returns to be filed when the entire trust is treated as a grantor trust for federal tax purposes.