Estate Income Tax: 2026 Brackets, Form 1041, and Deductions

An estate owes federal income tax on any earnings its assets produce between the date of death and the date those assets are distributed to heirs. Interest, dividends, rent, and capital gains that build up while an executor manages the estate are all taxable, and the brackets are steep: in 2026, the estate income tax hits the top 37% federal rate once taxable income exceeds just $16,000.¹ Because the brackets compress so aggressively, even a modest estate can face a surprisingly large tax bill if the executor lets income pile up instead of distributing it.

How It Differs From the Federal Estate Tax

These two taxes get confused constantly, but they work nothing alike. The federal estate tax is a one-time levy on the net value of a deceased person’s assets, and it only applies to estates worth more than the current exemption threshold, which leaves the vast majority of families untouched. The estate income tax applies to any estate that earns more than $600 in gross income during a tax year, regardless of the estate’s total value.²

A modest estate worth $300,000 might owe no estate tax at all but still generate enough rental income or interest to trigger a 1041 return every year the estate stays open. From the moment of death until the executor finishes distributing everything, the estate exists as its own taxpayer.

The 2026 Brackets

The reason estate income tax deserves close attention is the speed at which the rates escalate. An individual filer doesn’t hit the 37% bracket until taxable income exceeds roughly $626,000. An estate reaches that same rate at $16,000. For 2026, the brackets are:¹

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

The brackets skip 12% and 22% entirely. The jump from 10% to 24% is immediate. An estate sitting on a diversified portfolio that throws off $50,000 a year in income will pay far more in tax than most individual beneficiaries would on the same money. This compression is the single biggest reason executors should push income out to beneficiaries rather than let it accumulate inside the estate.

When the Estate Has to File

An estate must file IRS Form 1041 if it generates $600 or more in gross income during any tax year.² That threshold is low. Interest on a savings account, a handful of dividend payments, or one month of rent from a property the estate still holds can cross it easily.

A separate rule applies whenever any beneficiary is a nonresident alien. In that case the executor must file Form 1041 regardless of how much the estate earned, even if gross income for the year is zero.³

Unlike individuals, an estate can elect either a calendar year or a fiscal year. The first tax year begins on the date of death and can end on the last day of any month, so long as that first period doesn’t exceed 12 months.⁴ Picking a fiscal year that ends shortly before the death anniversary can defer income into a later reporting period and give the executor room to plan distributions.

What Counts as Taxable Income

Anything the estate’s assets earn during administration is taxable. The common categories are interest from bank accounts and bonds, dividends from stocks and mutual funds, and rent collected on real property the estate still holds.⁵ If the executor sells assets like a home or a brokerage account, any capital gain above the property’s tax basis is also reportable.

Stepped-Up Basis

Inherited property generally receives a new tax basis equal to its fair market value on the date of death.⁶ If someone bought stock for $10,000 twenty years ago and it was worth $100,000 at death, the estate’s basis is $100,000. That $90,000 of appreciation is never taxed as income. Capital gains tax only applies to any increase in value after the date of death.

Income in Respect of a Decedent

Some income doesn’t get the stepped-up basis. Income in respect of a decedent, or IRD, covers money the person had earned or was entitled to but hadn’t received before dying. A final paycheck, unpaid sales commissions, and distributions from traditional IRAs all fall into this category, as do deferred compensation payments.⁷ These amounts are taxed to whoever receives them, whether the estate or a beneficiary, because the decedent never paid income tax on them.

When the estate also owes federal estate tax, IRD items can get taxed twice: once through the estate tax on their value and again through income tax when they’re received. The tax code allows the person who reports the IRD to claim an income tax deduction for the portion of estate tax attributable to those items.⁸ It is easy to miss and worth real money in larger estates.

Deductions That Reduce the Bill

Administrative expenses like executor fees, attorney fees, accountant fees, and tax return preparation costs are all deductible.⁴ Estates also receive a $600 personal exemption.

The Distribution Deduction

The most powerful deduction is for income distributed to beneficiaries. When the estate pays income out to heirs, it deducts the amount distributed, and the beneficiaries pick up the income on their personal returns. That is how income moves out of the estate’s punishing brackets and into the beneficiaries’ typically lower ones.

There is a ceiling. The estate can only deduct distributions up to its distributable net income (DNI), which is essentially the estate’s taxable income with certain adjustments. DNI caps both the estate’s distribution deduction and the amount beneficiaries must include in their own income.⁹ Distributions above DNI aren’t taxable to the beneficiary and don’t generate a deduction for the estate. Capital gains allocated to principal are generally excluded from DNI, which means they usually stay taxed at the estate level.

The 65-Day Election

Executors don’t always know by December 31 exactly how much income the estate earned. Under the 65-day rule, distributions made within the first 65 days of a new tax year can be treated as if made on the last day of the prior year.¹⁰ The estate then claims a distribution deduction for the earlier year even though the money didn’t leave until early in the next one.

The election is made on the Form 1041 for the year the deduction applies, filed by the return’s due date including extensions. Once made, it is irrevocable, and the eligible amount cannot exceed the prior year’s DNI. This is the standard fix when the executor realizes in January or February that the estate accumulated more taxable income than expected.

Filing Form 1041

Before filing anything, the executor needs an Employer Identification Number, applied for free at IRS.gov using Form SS-4.¹¹ The EIN is the estate’s tax ID for every account and filing.

Income, deductions, and distributions go on Form 1041, the U.S. Income Tax Return for Estates and Trusts.⁵ The return is due by the 15th day of the fourth month after the estate’s tax year ends. For calendar-year estates, that is April 15.⁴ Form 7004, filed before the original due date, buys an automatic five-and-a-half-month extension to file, though not to pay.¹² Any tax owed is still due on the original deadline.

Missing the deadline costs 5% of the unpaid tax for each month the return is late, capped at 25%, plus interest on the unpaid balance from the original due date.¹³ Those charges come straight out of what beneficiaries eventually receive.

Estimated Tax Payments

Estates expecting to owe $1,000 or more in tax for 2026 may need to make quarterly estimated payments using Form 1041-ES.¹⁴ The requirement kicks in when withholding and credits won’t cover at least 90% of the current year’s liability or 100% of the prior year’s (110% if the estate’s adjusted gross income exceeded $150,000 in the prior year).

A brand-new estate has no prior-year return, so the prior-year safe harbor doesn’t apply in year one. Many first-year executors either make conservative estimates or distribute enough income to beneficiaries to keep the estate’s own liability under $1,000.

How Beneficiaries Report Their Share

When the estate distributes income, the tax obligation follows the money. The executor documents each beneficiary’s share on Schedule K-1 of Form 1041, which goes to both the IRS and the beneficiary.¹⁵ The K-1 breaks down the character of each type of income (interest, dividends, capital gains, and so on) so the beneficiary can report it on the correct lines of their Form 1040. The estate deducts what it distributed; the beneficiary picks it up on a personal return, usually at lower rates.

Excess Deductions in the Final Year

In the estate’s final tax year, deductions sometimes exceed income. Those leftover deductions pass through to the beneficiaries on the final Schedule K-1.¹⁶ Each deduction keeps its character: an administrative expense that would have been above-the-line for the estate stays above the line for the beneficiary, and itemized deductions remain itemized. Beneficiaries claim them on their personal returns for the tax year in which the estate terminates, reported through Box 11 of the K-1 using codes that identify the deduction type.¹⁵

State Fiduciary Income Tax

Federal isn’t the whole picture. Most states with an income tax also impose a fiduciary income tax on estates, with rates that vary widely. Some states have no income tax; others reach roughly 10% on top of the federal liability. The state where the decedent was domiciled at death usually has the primary taxing claim, though states where the estate holds real property or does business can also assert jurisdiction. Check with the relevant state tax agency early in the administration, because state deadlines and requirements don’t always mirror the federal ones.

1
Internal Revenue Service. Rev. Proc. 2025-32
2
Office of the Law Revision Counsel. 26 US Code 6012 – Persons Required to Make Returns of Income
3
Office of the Law Revision Counsel. 26 USC 6012 – Persons Required to Make Returns of Income
4
Internal Revenue Service. Instructions for Form 1041 and Schedules A, B, G, J, and K-1
5
Internal Revenue Service. File an Estate Tax Income Tax Return
6
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
7
Internal Revenue Service. Publication 559, Survivors, Executors, and Administrators
8
Office of the Law Revision Counsel. 26 US Code 691 – Recipients of Income in Respect of Decedents
9
Office of the Law Revision Counsel. 26 USC 643 – Definitions Applicable to Subparts A, B, C, and D
10
eCFR. 26 CFR 1.663(b)-1 – Distributions in First 65 Days of Taxable Year
11
Internal Revenue Service. Information for Executors
12
Internal Revenue Service. Instructions for Form 7004
13
Internal Revenue Service. Failure to File Penalty
14
Internal Revenue Service. 2026 Form 1041-ES
15
Internal Revenue Service. Instructions for Schedule K-1 (Form 1041) for a Beneficiary Filing Form 1040 or 1040-SR
16
eCFR. 26 CFR 1.642(h)-2 – Excess Deductions on Termination of an Estate or Trust