Is a Trust Taxed? Rates, Brackets, and Form 1041

A trust is taxed in one of three ways depending on how it’s classified. If it’s a grantor trust, the person who created it reports all the income on their personal return and the trust pays nothing. If it’s a non-grantor trust that distributes its income, the beneficiaries pay the tax. If it’s a non-grantor trust that keeps its income, the trust itself pays, and it pays at brutal rates: the top federal bracket of 37% kicks in at just $16,000 of taxable income for 2026.

Who the Taxpayer Is Depends on the Trust Type

The IRS sorts every trust into two buckets, and the bucket controls who writes the check.¹

A grantor trust exists when the person who created it keeps enough control over the assets or income that the IRS treats the trust as if it doesn’t exist for tax purposes. All income, deductions, and credits flow to the grantor’s Form 1040, and the grantor pays at individual rates. The trustee gives the grantor a statement of the trust’s income items so the grantor can pick them up on their return, and the trust generally doesn’t file its own Form 1041.²³

A non-grantor trust is a separate taxpayer. It files its own Form 1041 and either pays tax on income it retains or passes the liability to beneficiaries who receive distributions.³

Revocable and irrevocable trusts map loosely onto these categories but not automatically. A revocable trust is almost always a grantor trust because the grantor can undo it. An irrevocable trust is usually a non-grantor trust, but if the grantor retains certain powers spelled out in the code (the power to revoke, a reversionary interest worth more than 5% of the trust at the time of transfer, control over who benefits, or the ability to borrow without adequate security), even an irrevocable trust is taxed as a grantor trust.⁴⁵ If only part of the trust is subject to those powers, only that portion is taxed to the grantor; the rest follows the non-grantor rules.⁶

Simple Trusts, Complex Trusts, and the DNI Ceiling

Once a trust is on the non-grantor side, the tax code splits it again. A simple trust must distribute all its income every year, cannot distribute principal, and cannot make charitable gifts. Because everything goes out, the beneficiaries pay the tax on ordinary income, and the trust typically owes nothing on that income (though it still files a return).⁷

A complex trust is anything else. It can accumulate income, distribute principal, or give to charity. The trust pays tax on whatever it retains, and beneficiaries pay tax on whatever they receive. Income is not taxed twice: the trust deducts what it distributes, and beneficiaries report that same income on their returns.⁶

The split between trust and beneficiary is governed by distributable net income, or DNI. DNI caps both the trust’s distribution deduction and the amount beneficiaries must report as income. It starts with the trust’s taxable income and adjusts from there; the most important adjustments exclude capital gains that stay in the trust and include tax-exempt interest.⁸ Distribute more than DNI and the excess isn’t taxable to beneficiaries; the trust also can’t wipe out its tax bill by distributing principal, since the deduction is capped at DNI.⁹

Distributed income keeps its character on the way out. Qualified dividends stay qualified dividends. Tax-exempt interest stays tax-exempt. Beneficiaries apply the same preferential rates they’d apply to income earned directly.

2026 Trust Tax Rates and Brackets

The reason distribution planning matters so much is bracket compression. A single individual doesn’t reach 37% until taxable income exceeds roughly $626,000. A non-grantor trust hits the same rate at $16,000. The 2026 schedule for ordinary income retained by a trust:

10% on taxable income up to $3,300
24% on $3,301 to $11,700
35% on $11,701 to $16,000
37% on anything over $16,000

Trusts skip the 12% and 22% brackets entirely. A trust that keeps $20,000 of ordinary income pays a higher effective rate than most individuals would on the same amount.

Long-Term Capital Gains

Capital gains kept inside the trust face the same compression. For 2026:

0% up to $3,300
15% on $3,301 to $16,250
20% over $16,250

Capital gains are generally allocated to principal rather than treated as distributable income, so they usually stay in the trust and are taxed there. The trust instrument or state law can override that default.

Net Investment Income Tax

A non-grantor trust may also owe the 3.8% Net Investment Income Tax on undistributed investment income. The NIIT applies to the lesser of the trust’s net investment income or the amount by which its adjusted gross income exceeds the threshold for the top bracket, which is $16,000 for 2026.¹⁰ A trust with $20,000 of retained investment income can face a combined 40.8% federal rate on the portion above $16,000. Pushing the income out to beneficiaries avoids the NIIT at the trust level, though those beneficiaries may owe it themselves if their income exceeds the individual thresholds of $200,000 (single) or $250,000 (married filing jointly).¹¹

Two Tools to Shift Income to Lower Brackets

Given how quickly trust-level rates climb, trustees of complex trusts have two useful levers.

The 65-Day Rule

Under Section 663(b), any distribution made in the first 65 days of a new tax year can be treated as if it were made on the last day of the prior year. The trustee can wait to see how the year’s income actually shook out before deciding how much to push to beneficiaries for that year’s tax purposes.¹² The back-dated amount can’t exceed prior-year DNI, and the election must be made affirmatively on the prior year’s return; it isn’t automatic. Trustees who don’t know the election exists routinely pay tax at trust-level rates on income that could have gone to beneficiaries in lower brackets.

Charitable Deductions

Trusts get a better charitable deduction than individuals. A trust can deduct the full amount of gross income it pays to a qualified charity, with no percentage-of-income cap, as long as the trust instrument authorizes the payment. The trustee can also elect to treat charitable contributions made in the first year after the tax year closes as if paid during that prior tax year.¹³

What Changes When the Grantor Dies

For a revocable trust, the grantor’s death flips the entire tax treatment. The trust can no longer be revoked, so it stops being a grantor trust and becomes a non-grantor trust. It needs its own EIN and starts filing Form 1041.¹⁴

Assets held in a revocable trust at death generally get a step-up in basis to fair market value, the same as assets passing through a will.¹⁵ Assets in an irrevocable grantor trust are treated differently. Under IRS Revenue Ruling 2023-2, assets transferred to an irrevocable grantor trust that aren’t included in the grantor’s taxable estate do not get a step-up. Beneficiaries inherit the grantor’s original basis and face capital gains tax on the full appreciation when they sell.

When the decedent left both an estate and a revocable trust, the executor and trustee can elect under Section 645 to treat the trust as part of the estate for tax purposes. The election is filed on Form 8855 by the due date of the estate’s first income tax return (including extensions), and once made it can’t be undone. The election period runs two years after death if no estate tax return is required, or six months after the final estate tax determination if one is.¹⁶

Filing Form 1041

A non-grantor trust files Form 1041 if it has gross income of $600 or more, or any taxable income at all, during the year.⁶ For a calendar-year trust, Form 1041 is due April 15.¹⁷ Filing Form 7004 buys an automatic five-and-a-half-month extension to the end of September.¹⁸ The extension covers the return, not the tax. Any tax owed is still due April 15.

Every beneficiary who received or was entitled to a distribution gets a Schedule K-1 from the trust. The K-1 breaks the income down by character (ordinary, qualified dividends, capital gains, tax-exempt interest) so the beneficiary reports it correctly. Beneficiaries are legally required to include K-1 amounts on their Form 1040.⁶

Trusts have no withholding. If a non-grantor trust expects to owe $1,000 or more in federal tax for the year, it makes quarterly estimated payments on Form 1041-ES.¹⁹ The calendar-year deadlines are April 15, June 15, September 15, and January 15 of the following year.

Late filing runs 5% of unpaid tax per month, up to 25%. If the return is more than 60 days late, the minimum penalty is the smaller of $525 or the total tax due. Late payment adds another 0.5% per month, also capped at 25%. Interest runs on top of both. The IRS can waive the penalties for reasonable cause.⁶

Two Situations These Rules Don’t Cover

Foreign trusts trigger separate reporting on Form 3520 for U.S. persons who create one, transfer to one, are treated as owning part of one, or receive a distribution from one. Penalties for missing the form start at the greater of $10,000 or a percentage of the amounts involved, and a foreign country’s own disclosure penalties are explicitly not reasonable cause for skipping the U.S. filing.²⁰

State income tax is a separate question from federal. Most states that tax income tax trust income, but they use different tests: some look to where the grantor lived, some to where the trustee is located, some to where the trust was created or where its assets sit. A handful of states impose no income tax at all, which makes trust situs a real planning variable. A trust with connections to more than one state may end up filing in more than one.

1
Internal Revenue Service. Defining the Entity – Foreign Trusts
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Internal Revenue Service. Abusive Trust Tax Evasion Schemes – Facts (Section II)
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Internal Revenue Service. Abusive Trust Tax Evasion Schemes – Questions and Answers
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Office of the Law Revision Counsel. 26 USC 676 – Power to Revoke
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Office of the Law Revision Counsel. 26 USC 673 – Reversionary Interests
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Internal Revenue Service. 2025 Instructions for Form 1041 and Schedules A, B, G, J, and K-1
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IRS. Taxation of Beneficiary of a Foreign Non-Grantor Trust
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Office of the Law Revision Counsel. 26 USC 643 – Definitions Applicable to Subparts A, B, C, and D
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Office of the Law Revision Counsel. 26 USC 651 – Deduction for Trusts Distributing Current Income Only
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Internal Revenue Service. Topic No. 559, Net Investment Income Tax
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Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
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Office of the Law Revision Counsel. 26 USC 663 – Special Rules Applicable to Sections 661 and 662
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Office of the Law Revision Counsel. 26 USC 642 – Special Rules for Credits and Deductions
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Internal Revenue Service. When to Get a New EIN
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Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
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Office of the Law Revision Counsel. 26 USC 645 – Certain Revocable Trusts Treated as Part of Estate
17
Internal Revenue Service. Forms 1041 and 1041-A: When to File
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Internal Revenue Service. Instructions for Form 7004
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Internal Revenue Service. 2025 Form 1041-ES
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Internal Revenue Service. Instructions for Form 3520