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What is a tax nexus?

On Behalf of | Sep 8, 2021 | Trusts & Trust Administration |

A tax nexus sounds like something out of science fiction. However, if you are the administrator of the trust, you have to know what it is and whether the trust has one because it affects your responsibility to pay taxes on it.

According to the New Jersey Department of Taxation, the word “nexus” refers to a tax presence in the state. If the trust that you administer has sufficient nexus, you have to pay taxes on its behalf. Otherwise, it is exempt.

How do you know whether the trust has sufficient tax nexus?

Whether the trust has sufficient tax nexus depends partly on its type. For example, if you administer an institutional trust from an office outside of New Jersey, it still has a tax presence if the institution has offices within the state from which it conducts business. A resident trust does not have sufficient nexus if it meets all of the following three conditions:

  • No executors or trustees in New Jersey
  • No income from New Jersey sources
  • No physical assets in New Jersey

What do you do if the trust does not have sufficient nexus?

If you administer a trust that meets the criteria for tax exemption on the basis of insufficient nexus, you still have to file a state income tax form on behalf of the trust. However, you can check the box indicating that the trust is not subject to tax. When you submit the form, you must also provide a statement certifying the trust’s tax status.

When administering a trust, you need to learn what unfamiliar legal terms mean so you can live up to your responsibilities.