How Trusts Are Taxed: A Plain-English Guide to Trust Taxes
How trusts are taxed explained: grantor vs non-grantor trusts, trust tax brackets, Form 1041, K-1s, distributable net income, the 3.8% NIIT, capital gains, the 65-day rule and step-up in basis.
Understanding how trusts are taxed starts with one question: does the trust pay its own tax, or does the person behind it? A revocable living trust usually pays nothing separately, because its income lands on the creator’s personal return. A non-grantor trust is a separate taxpayer that files its own return, and it reaches the top federal rate at a tiny fraction of the income an individual needs. This plain-English guide explains how trusts are taxed in the United States, shows the 2026 trust tax brackets and where sources disagree, walks through Form 1041, K-1 reporting and distributable net income, covers the net investment income tax and the 65-day rule and explains when heirs get a stepped-up basis. Tax rules change every year, so confirm figures with a tax professional.
Quick Answer: How Are Trusts Taxed?
- Grantor trusts: the grantor pays tax on the trust’s income, and no separate return is needed, according to Fidelity and Millan + CO CPAs.
- Non-grantor trusts: the trust is a separate taxpayer that files Form 1041, and income it distributes is generally taxed to beneficiaries on a Schedule K-1.
- Rates: trusts and individuals face the same top federal rate of 37%, but trusts reach it at about $16,000 of income, versus $640,600 for a single individual in 2026, per Fidelity.
- Extra tax: the 3.8% net investment income tax can apply to undistributed income, bringing the top rate to 40.8%.
- Filing trigger: gross income of $600 or more, any taxable income or a nonresident alien beneficiary.
How Trusts Are Taxed: Grantor vs. Non-Grantor Trusts
Fidelity notes that, for income tax, trusts are classified as grantor or non-grantor trusts rather than simply revocable or irrevocable. The distinction decides who pays.
| Feature | Grantor trust | Non-grantor trust |
|---|---|---|
| Who pays income tax | The grantor | The trust on retained income, beneficiaries on distributed income |
| Separate return | Generally none; reported on the grantor’s Form 1040 | Form 1041 |
| Examples | Revocable living trust, intentionally defective grantor trust | Simple and complex trusts |
| Source | Fidelity, Millan + CO CPAs | Fidelity, Q3 Advisors |
Millan + CO CPAs adds that a revocable trust files no separate return while the grantor is alive, and that it must obtain a taxpayer identification number at the grantor’s death, when it becomes irrevocable. Irrevocable, complex and simple trusts must obtain a TIN when created.
How Revocable Trusts Are Taxed
A revocable living trust is a grantor trust, so you report its income on your own Form 1040 while you are alive. Fidelity adds that transfers into it are not completed gifts and the assets are included in the taxable estate at death.
How Irrevocable Trusts Are Taxed
An irrevocable trust is taxed according to its design. If it is a non-grantor trust, it files Form 1041 each year. If it is an intentionally defective grantor trust, Fidelity says the grantor pays income tax on trust income, but the transfer is not treated as incomplete for transfer-tax purposes, so the assets are generally excluded from the taxable estate.
Simple vs. Complex Trusts: How Trusts Are Taxed Differently
Fidelity and Beancount.io define the two types of non-grantor trust.
| Type | Rules | Tax effect |
|---|---|---|
| Simple trust | Must distribute all income currently; no principal or charitable distributions | Beneficiaries pay income tax on the income; the trust pays tax on capital gains (Fidelity) |
| Complex trust | May accumulate income, distribute principal or give to charity | Beneficiaries, the trust or both may pay, depending on the year (Fidelity) |
| Estate | Behaves much like a complex trust, with its own filing rules | Same Form 1041 system (Beancount.io) |
2026 Trust Tax Brackets: How Trusts Are Taxed on Retained Income
Trusts use compressed brackets. The sources disagree slightly on the 2026 breakpoints, so each is shown.
| Bracket | Q3 Advisors | Beancount.io |
|---|---|---|
| 10% | Up to $3,300 | First $3,250 |
| 24% | Over $3,300 to $11,700 | $3,250 to $11,750 |
| 35% | Over $11,700 to $16,000 | $11,750 to $15,200 |
| 37% | Over $16,000 | Above $15,200 |
Fidelity gives $16,000 as the start of the 37% bracket for trusts, which matches Q3 Advisors, and Q3 says trusts skip the 12%, 22% and 32% brackets. Beancount.io’s article also cites an individual threshold of $626,350 that matches 2025 tables, which suggests it uses older figures. Check the current IRS inflation adjustments before you file.
The comparison with an individual explains why trust tax planning matters.
| Taxpayer | Income where the 37% rate begins (2026) |
|---|---|
| Trust | $16,000 (Fidelity, Q3 Advisors) |
| Single individual | $640,600 (Fidelity, Q3 Advisors) |
Net Investment Income Tax
Q3 Advisors says the 3.8% NIIT applies to the lesser of undistributed net investment income or the excess of adjusted gross income over the top-bracket threshold, which is $16,000 for 2026, producing a combined top marginal rate of 40.8%. Fidelity contrasts that with an individual, for whom the tax applies above $200,000 of modified adjusted gross income, a threshold that is not inflation-adjusted.
Capital Gains
Fidelity says a simple trust pays the tax on capital gains. Beancount.io explains that, under Regulation 1.643(a)-3, capital gains generally stay in the trust unless the trust document allocates them to income, a consistent practice treats them as distributed, or they fund a specific bequest. Q3 Advisors lists estate and trust capital gains rates of 0%, 15% and 20%, but its table puts the 15% and 20% breakpoints at the same $16,250 figure, so the boundary is unclear. Confirm the exact thresholds on the IRS tables.
Form 1041: How Trusts Are Taxed on Paper
Form 1041 is the federal income tax return for estates and trusts, filed by the fiduciary, according to Beancount.io.
| Item | Detail | Source |
|---|---|---|
| Who files | Trusts with gross income of $600 or more, any taxable income or a nonresident alien beneficiary | Millan + CO CPAs, Beancount.io |
| Due date | April 15 for calendar-year trusts | Beancount.io, Millan + CO CPAs |
| Extension | Form 7004: five and a half months, to September 30 | Beancount.io |
| Extension (other source) | Six months | Millan + CO CPAs |
| Estimated taxes | Required if the trust expects to owe $1,000 or more | Millan + CO CPAs |
| Exemption | $100 for a complex trust, $300 for a simple trust and $600 for an estate | Beancount.io, Q3 Advisors |
The extension length differs between the two sources, so verify it with the form instructions.
Distributable Net Income and the K-1
Distributable net income, or DNI, caps both the deduction the trust takes for distributions and the income taxed to beneficiaries, according to Q3 Advisors and Beancount.io. It is computed on Schedule B of Form 1041.
- The trust gets a distribution deduction equal to the lesser of DNI or the income actually distributed.
- Each beneficiary receives a Schedule K-1 showing their share, which keeps its character, such as qualified dividends or long-term gains, and is reported on the beneficiary’s Form 1040.
- Principal distributions are generally not taxable to the beneficiary, per Q3 Advisors.
Beancount.io describes a two-tier system under Section 662: tier 1 covers amounts required to be distributed currently and is paid first, while tier 2 covers discretionary or principal distributions and takes any remaining DNI. Fidelity points out that distributing income to beneficiaries may lower the overall tax, because the trust takes a deduction and beneficiaries may be in lower brackets, though limits apply.
Example of Why Distributions Matter
Using Fidelity’s 2026 numbers, a trust that keeps $50,000 of ordinary income pays most of it at 37%, because the top bracket starts at $16,000. If the trust distributes the income to a beneficiary in a lower bracket, the beneficiary pays at the beneficiary’s own rate. This example uses only the bracket threshold above and ignores state tax and the NIIT.
The 65-Day Rule and How Trusts Are Taxed on Distributions
Under Section 663(b), the fiduciary of a complex trust or estate may elect to treat amounts paid within 65 days after year-end as paid on the last day of the prior year, according to Q3 Advisors. Beancount.io says the election is annual and irrevocable, made on Form 1041 by the filing deadline, including extensions, and runs to about March 6 for calendar-year filers. The distribution cannot exceed the greater of accounting income or DNI for the prior year, and the fiduciary must designate the covered distributions.
Stepped-Up Basis: Trusts and Heirs
The basis question affects heirs more than annual tax, and it is a key part of how trusts are taxed over time. Fidelity says assets in a revocable trust are included in the taxable estate at death. The Tax Adviser reports that under Rev. Rul. 2023-2, assets in an irrevocable grantor trust receive no step-up under Section 1014(a) at the grantor’s death if the grantor’s gross estate does not include them, even though the grantor may owe income tax on the trust’s income. Ask your attorney whether a planned structure gives up the step-up for estate-tax savings.
Estate and Gift Tax Basics Beyond How Trusts Are Taxed on Income
The sources focus on how trusts are taxed for income purposes, but Fidelity notes that trusts may reduce or eliminate transfer costs such as gift and estate taxes and probate fees. It gives no exemption amounts. Confirm the current exemption amounts with an adviser.
How to Reduce Trust Taxes Once You Know How Trusts Are Taxed
- Choose the right type. A grantor trust avoids the compressed brackets by putting income on the grantor’s return.
- Distribute income deliberately. Beneficiaries in lower brackets can reduce the family’s total tax.
- Use the 65-day election for complex trusts.
- Match investments to the trust. Fidelity notes that undistributed investment income can face the NIIT.
- Track DNI and K-1s to avoid double reporting.
- File on time and make estimated payments when the trust expects to owe $1,000 or more.
- Hire a fiduciary tax professional.
Common Mistakes When Reporting Trust Taxes
- Leaving income inside the trust and paying top rates.
- Missing the TIN at the grantor’s death for a revocable trust.
- Ignoring estimated tax payments.
- Assuming a step-up in basis for assets in an irrevocable grantor trust.
- Using stale bracket tables from earlier years.
Frequently Asked Questions
How are trusts taxed in the United States?
Grantor trusts are taxed to the grantor on Form 1040. Non-grantor trusts file Form 1041, pay tax on retained income at compressed brackets and issue K-1s for distributed income.
What is the trust tax rate in 2026?
The top federal rate is 37%, which begins at $16,000 of taxable income, according to Fidelity and Q3 Advisors.
Does a revocable trust pay taxes?
Not separately. The grantor reports the income on a personal return, per Millan + CO CPAs.
Who pays tax on trust distributions?
Beneficiaries generally pay on income distributed to them, as reported on Schedule K-1, up to the trust’s DNI.
What is Form 1041?
It is the federal income tax return for estates and trusts, required at $600 of gross income, any taxable income or a nonresident alien beneficiary.
Do trusts get a step-up in basis?
Assets in a revocable trust are included in the estate, and an irrevocable grantor trust’s assets may not get a step-up if excluded from the grantor’s estate, per The Tax Adviser.
This guide gives general tax information and is not tax or legal counsel. Rates, brackets and thresholds change annually, and the sources above sometimes disagree, so ask a CPA or trust attorney to confirm the figures for your trust.
Sources
- Q3 Advisors, Craig Wear, CFP, “How Are Irrevocable Trusts Taxed? 2026 Rates and Rules” (July 6, 2026, reviewed October 5, 2026) – https://q3adv.com/how-are-irrevocable-trusts-taxed/
- Fidelity, “Trusts and taxes: What you need to know” (September 10, 2026) – https://www.fidelity.com/viewpoints/wealth-management/insights/trusts-and-taxes
- Beancount.io, Mike Thrift, “Form 1041 Explained: Compressed Brackets, DNI, and the K-1 Conduit That Decide Trust Tax Bills” (May 13, 2026, updated August 10, 2026) – https://beancount.io/blog/2026/05/13/form-1041-trust-estate-income-tax-compressed-brackets-distributable-net-income-dni-beneficiary-k-1-fiduciary-guide
- Millan + CO CPAs, “Navigating Trust Taxation: A Guide to US Filing Requirements” (undated) – https://millancpa.com/insights/navigating-trust-taxation-a-guide-to-us-filing-requirements
- The Tax Adviser, Martha Waggoner, “No Basis Step-Up for Grantor Trust Assets” (March 31, 2023) – https://www.thetaxadviser.com/news/2023/mar/no-basis-step-up-for-grantor-trust-assets/
