The complex trust exemption amount is either $100 or $300, set by Section 642(b) of the Internal Revenue Code. A complex trust gets $300 if its governing instrument requires all income to be distributed currently, and $100 in every other case. One important exception sits on top of that: a qualified disability trust gets a much larger exemption, indexed for inflation, which comes to $5,300 for 2026.1Internal Revenue Service. Rev. Proc. 2025-32
Which Amount Applies to Your Trust
The test is what the trust document requires, not what the trustee actually did. Read the governing instrument. If it directs that all income be distributed currently to beneficiaries, the trust qualifies for the $300 exemption.2Office of the Law Revision Counsel. 26 USC 642 – Special Rules for Credits and Deductions Every other complex trust gets $100, including any trust that gives the trustee discretion to accumulate income.
The $300 figure can look contradictory at first. A trust that distributes all its income sounds like a simple trust, and in most years it would be. But a trust can be required to distribute all income and still land in the complex category for a given year, because distributing principal or making a charitable gift knocks a trust out of simple status for that year. The $300 exemption follows the mandatory-distribution feature in the document, even when other activity forces the trust to file as complex.
Both amounts are fixed by statute and not adjusted for inflation, which is why they have not changed in decades. The trustee’s job is to check the language of the instrument and apply the amount that matches it.
Qualified Disability Trusts Get a Much Larger Exemption
If the trust is a qualified disability trust, the $100/$300 rule does not apply. The exemption for 2026 is $5,300, and it is adjusted annually.1Internal Revenue Service. Rev. Proc. 2025-32 To qualify, the trust must be a disability trust recognized under the Social Security Act, and all beneficiaries must have been determined by the Social Security Administration to be disabled for at least part of the tax year.2Office of the Law Revision Counsel. 26 USC 642 – Special Rules for Credits and Deductions The status is not lost merely because remaining assets would revert to a non-disabled person after all disabled beneficiaries have died.
Because trust tax rates are so compressed, the gap between $100 and $5,300 is worth confirming with a tax professional if there’s any chance the trust qualifies.
Why the Exemption Matters
Trust tax brackets are far tighter than individual brackets. For 2026, a complex trust’s retained taxable income runs through this schedule:1Internal Revenue Service. Rev. Proc. 2025-32
- 10% on taxable income up to $3,300
- 24% from $3,301 to $11,700
- 35% from $11,701 to $16,000
- 37% on anything over $16,000
An individual doesn’t reach 37% until taxable income passes roughly $626,000. A trust reaches it at $16,000. Every dollar of deduction at the trust level therefore carries more weight than it would for most individuals, and the exemption sits at the very end of the calculation, chipping directly at the income exposed to the top bracket.
The Net Investment Income Tax adds another 3.8% on the lesser of the trust’s undistributed net investment income or the amount by which its adjusted gross income exceeds the top-bracket threshold.3Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax For 2026 that threshold is the same $16,000 where the 37% bracket kicks in, so retained investment income above that point faces a combined marginal rate of 40.8%.
Where the Exemption Fits in the Taxable Income Calculation
The exemption is the last item subtracted before you arrive at the trust’s taxable income. The calculation runs like this: start with the trust’s gross income, subtract allowable deductions such as trustee fees and tax preparation costs to reach adjusted total income, then subtract the distribution deduction for amounts passed out to beneficiaries. What’s left is the income the trust retains. Subtract $100 or $300, and that’s the number that runs through the bracket schedule above.
The distribution deduction is the mechanism that shifts income off the trust’s return and onto beneficiaries’. The trust deducts the lesser of total distributions made during the year or its Distributable Net Income (DNI).4Office of the Law Revision Counsel. 26 USC 661 – Deduction for Estates and Trusts Accumulating Income or Distributing Corpus DNI is derived from taxable income by adding back the exemption and net tax-exempt interest and subtracting capital gains allocated to principal. Capital gains allocated to principal stay in the trust and get taxed there, which is one place the compressed brackets bite hardest.
The 65-Day Election Is Where Planning Happens
If the trust retained more income last year than you wanted, Section 663(b) offers a second chance. A trustee can elect to treat distributions made within the first 65 days of a new tax year as if they were made on the last day of the prior tax year.5Office of the Law Revision Counsel. 26 USC 663 – Special Rules Applicable to Sections 661 and 662 Once the prior year’s numbers are known, the trustee can push income out to beneficiaries retroactively and pull it out of the trust’s 37% bracket.
The election has to be made by the filing deadline for the trust’s return for the year involved, and the amount treated as prior-year is capped at the greater of that year’s accounting income or DNI, reduced by amounts already distributed during that year.6eCFR. 26 CFR 1.663(b)-1 – Distributions in First 65 Days of Taxable Year; Scope It applies only to the year for which it’s made, so the trustee has to elect again each year it’s useful.
For a trust sitting near or over the $16,000 threshold, this is usually the tool that moves the tax bill, not the exemption itself. The $100 or $300 trims a little off the top; the 65-day election can shift thousands of dollars of income from the trust’s rate schedule to a beneficiary’s.