663(b) Election: How the 65-Day Rule Works for Trusts

The Section 663(b) election lets the fiduciary of a complex trust or estate treat distributions made within the first 65 days of the new tax year as if they had been paid on the last day of the prior year. It is made by checking the designated box (currently Question 6) in the Other Information section of IRS Form 1041 and filing that return by its due date, including extensions. The stakes are high because estates and trusts hit the top 37% federal rate at just $16,000 of taxable income in 2026, while a single individual doesn’t reach that rate until $640,600, so shifting income to a beneficiary can save real money.¹²

Who Can Make the Election

The election is available to the executor of a decedent’s estate or the fiduciary of a complex trust.³ Simple trusts are not eligible. A simple trust is one whose governing instrument requires all income to be distributed currently, so there is no retained income to push out and no timing gap to close.

Complex trusts and estates are different. They may accumulate income or make discretionary distributions, and they face the real risk of paying tax at the compressed entity rates on income that could have been taxed more cheaply in a beneficiary’s hands. The election exists for them.

One wrinkle for estates: unlike most trusts, an estate can elect a fiscal year-end rather than a calendar year. The 65-day window still runs from the close of whatever tax year the estate uses. An estate with a fiscal year ending June 30 would have until September 3 to make qualifying distributions.

The 65-Day Deadline

The distribution itself must be properly paid or credited to the beneficiary within the first 65 days after the close of the entity’s tax year.³ For a calendar-year trust or estate, that means March 6 of the following year. In a leap year, it’s March 5.

The clock runs from the actual distribution date, not from when the fiduciary decides to make the election or files the return. Money must leave the entity’s hands (or be properly credited to the beneficiary’s account) inside the window. A check mailed on March 6 that arrives March 8 can create a problem. Build in a cushion.

The election is annual and optional. A fiduciary might use it one year and skip the next depending on the tax picture. But once made for a given year, it is irrevocable for that year.

How to Make the Election on Form 1041

The election is made on the entity’s annual income tax return, IRS Form 1041. On the 2025 return, the fiduciary checks the box for Question 6 in the Other Information section.⁴ Checking that box tells the IRS that distributions made in the first 65 days of 2026 should be treated as paid on December 31, 2025.

The fiduciary designates the specific dollar amount covered. The election can cover the full amount distributed during the 65-day window or only a portion of it. The elected amount flows through Schedule B, where the income distribution deduction is calculated.

The deadline to make the election is the due date for filing Form 1041, including any extensions. For a calendar-year entity, the original due date is April 15.⁵ A valid extension pushes the filing deadline (and therefore the election deadline) to September 30, giving the fiduciary additional time to finalize the tax picture before committing. This is why tax advisors routinely file extensions for trusts and estates even when they expect to file earlier.

How Much You Can Elect

The election is capped. Treasury regulations limit the elected amount to the greater of the trust’s accounting income or its distributable net income (DNI) for the year, reduced by amounts that were actually paid, credited, or required to be distributed during the year itself.⁶

In practice, the election fills the gap between what was already distributed during the year and the maximum distributable amount. A trust with $80,000 in DNI for 2025 that distributed $50,000 during the year can elect up to $30,000 of early-2026 distributions back to 2025. Anything distributed beyond that during the 65-day window is simply a 2026 distribution.

The regulation uses the greater of accounting income or DNI because the two figures can differ. Accounting income is defined by the trust instrument and state law; DNI is a federal tax concept. Using the higher figure gives the fiduciary maximum flexibility.

What the Election Does to the Trust or Estate’s Tax

The immediate effect is a larger income distribution deduction on Schedule B, which reduces the trust or estate’s taxable income for the prior year.⁴ The distribution counts as paid on the last day of the prior tax year even though the cash didn’t move until January, February, or early March.

Because that deduction can’t exceed DNI, the election effectively moves income from the entity to the beneficiary.⁷ At 2026 rates, any retained taxable income above $16,000 inside the trust or estate is taxed at 37%. Distributing that income to a beneficiary in the 22% or 24% bracket saves 13 to 15 cents on every dollar shifted.¹

Net Investment Income Tax

The election can also reduce or eliminate the 3.8% Net Investment Income Tax. The NIIT applies to a trust or estate when adjusted gross income exceeds the dollar amount at which the top ordinary bracket begins.⁸ For 2026, that threshold is $16,000, the same level where the 37% rate starts.¹

The NIIT applies to the lesser of the entity’s undistributed net investment income or the excess of AGI over the threshold. Pushing investment income out to beneficiaries under the election reduces both figures. A trust with $60,000 of investment income that distributes $50,000 under the election may drop below the NIIT threshold entirely, avoiding an additional 3.8% on top of the 37% ordinary rate.

What the Election Does to the Beneficiary

Beneficiaries pick up the income on their individual return for the year the trust or estate claimed the deduction, not the year they actually received the cash. The regulation is explicit that amounts elected back under Section 663(b) are treated as received in the prior year “for all purposes.”⁹ A distribution physically received in February 2026 that gets elected back to 2025 must appear on the beneficiary’s 2025 tax return.

That creates a practical problem when the beneficiary has already filed. The fiduciary has until September 30 (with an extension) to make the election, so a beneficiary who filed in February may not learn about the shifted income until months later. The fix is Form 1040-X to amend the prior year.

The shifted income appears on the beneficiary’s Schedule K-1 (Form 1041) for the prior tax year, combined with anything distributed during the year itself.¹⁰ Fiduciaries should warn beneficiaries early when an election is likely, so they can delay filing or plan for an amendment.

If You Miss the Election

A fiduciary who doesn’t check the box on Form 1041 before the filing deadline (including extensions) has missed the election for that year. Distributions made in the 65-day window then count as ordinary current-year distributions, with no retroactive effect.

The IRS has a framework for granting relief on late regulatory elections under the Section 9100 rules, but the 663(b) election is not among those that qualify for automatic 12-month relief. A fiduciary seeking to make a late election has to request discretionary relief through a private letter ruling, showing that they acted reasonably and in good faith and that relief won’t prejudice the government’s interests. Private letter rulings involve substantial IRS user fees and professional costs, so prevention is far cheaper than cure.

The cheapest protection is filing an extension for the Form 1041. That moves the election deadline from April 15 to September 30 for a calendar-year entity, giving the fiduciary nearly ten months after year-end to run the numbers.⁵

A Worked Example

A complex trust has $75,000 of DNI for 2025 and distributed $20,000 to its sole beneficiary during the year. The remaining $55,000 would be taxed inside the trust at rates up to 37%, roughly $17,400 in federal income tax before NIIT. The beneficiary is in the 24% bracket.

In January 2026, the trustee distributes another $40,000 to the beneficiary. The trustee files the trust’s 2025 Form 1041, checks the box for Question 6, and designates the full $40,000 as a prior-year distribution under Section 663(b). The trust’s distribution deduction for 2025 is now $60,000 ($20,000 during the year plus $40,000 elected back), leaving $15,000 taxable at the entity level.³

At $15,000, the trust’s taxable income falls below the $16,000 threshold for both the 37% rate and the NIIT. The beneficiary reports $60,000 from the trust on their 2025 individual return and pays tax at 24%. The election saves the difference between the trust’s 37% rate (plus 3.8% NIIT) on that $40,000 and the beneficiary’s 24% rate, roughly $6,300 on a single distribution decision.

1
Internal Revenue Service. 2026 Form 1041-ES Estimated Income Tax for Estates and Trusts
2
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
3
Office of the Law Revision Counsel. 26 USC 663 – Special Rules Applicable to Sections 661 and 662
4
Internal Revenue Service. 2025 Instructions for Form 1041 and Schedules A, B, G, J, and K-1
5
Internal Revenue Service. Forms 1041 and 1041-A When to File
6
eCFR. 26 CFR 1.663(b)-1 – Distributions in First 65 Days of Taxable Year
7
Office of the Law Revision Counsel. 26 USC 661 – Deduction for Estates and Trusts Accumulating Income
8
Internal Revenue Service. Topic No. 559 Net Investment Income Tax
9
eCFR. 26 CFR 1.663(b)-1 – Distributions in First 65 Days of Taxable Year Scope
10
Internal Revenue Service. Instructions for Schedule K-1 (Form 1041) for a Beneficiary Filing Form 1040 or 1040-SR (2025)