Federal trust and estate tax rates for 2026 climb through four brackets and reach the top 37% rate at just $16,000 of taxable income, compared with roughly $626,350 for a single individual. That compression is the whole story: a trust with $20,000 of taxable income owes about $5,331 in federal tax, while an individual with the same income owes roughly $2,180. The gap is why distribution planning matters so much for fiduciaries.
2026 Ordinary Income Brackets for Trusts and Estates
The Internal Revenue Code imposes a four-bracket schedule on trusts and estates. For 2026, the thresholds published in Rev. Proc. 2025-32 are:1Internal Revenue Service. Rev. Proc. 2025-32
- 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 rates themselves are set by statute and don’t move with inflation. Only the dollar thresholds adjust each year. Because the 37% bracket begins at $16,000, most trusts and estates with meaningful investment portfolios sit in the top bracket by default, and every dollar of undistributed income above that line is taxed at 37% at the federal level before any state tax.
Long-Term Capital Gains and Qualified Dividends
Long-term capital gains and qualified dividends follow a separate rate schedule that is equally compressed. For trusts and estates in 2026:2Internal Revenue Service. 2026 Form 1041-ES, Estimated Income Tax for Estates and Trusts
- 0% on gains within taxable income up to $3,300
- 15% on gains within taxable income from $3,301 to $16,250
- 20% on gains within taxable income above $16,250
A trust reaches the 20% capital gains rate at $16,250. A single individual doesn’t reach it until $533,400.
Capital gains also get a distinctive treatment when income is distributed. By default, gains are allocated to trust principal rather than to Distributable Net Income, which means the trust itself typically pays the tax on gains even when it distributes ordinary income to beneficiaries. The trust document can override the default, and some fiduciaries deliberately allocate gains to income so the tax flows through to beneficiaries at their lower rates. Without that language, the gain stays inside the trust.
The 3.8% Net Investment Income Tax
On top of the regular tax, trusts and estates owe a 3.8% surtax under Section 1411 on undistributed net investment income once adjusted gross income crosses the threshold where the top bracket begins.3Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax For 2026, that threshold is $16,000.1Internal Revenue Service. Rev. Proc. 2025-32
Investment income for this purpose includes interest, dividends, capital gains, rental income, and royalties. The surtax doesn’t apply to income the trust distributes because that income is no longer undistributed. Stacked on the 37% ordinary rate, the NIIT produces an effective 40.8% federal rate on retained investment income above $16,000. On long-term capital gains, the effective top rate becomes 23.8%.
Why Accumulated Income Is So Expensive
Accumulated income is any earnings the trust or estate keeps rather than pays out to beneficiaries. Every retained dollar is taxed at the entity level using the compressed brackets, with no deduction for what stays inside.
Consider a trust holding $50,000 in ordinary investment income and distributing none of it. The federal income tax on that income runs roughly $16,500, plus NIIT on the amount above $16,000. If the same income were distributed to a beneficiary in the 22% bracket, the combined tax would be closer to $11,000, and no NIIT would apply because the income is no longer undistributed. The difference is real money, and it repeats year after year when trusts accumulate income by habit rather than by design.
There are legitimate reasons to retain income. The trust document may require it. The beneficiary may be a minor, in the middle of a lawsuit, or unable to manage funds responsibly. When none of those constraints apply, distribution almost always produces a lower combined tax.
The Distribution Deduction and Distributable Net Income
The distribution deduction is what prevents the same dollar from being taxed twice. When the fiduciary pays income out, the entity deducts the amount and the beneficiary reports it on their personal return, paying tax at their individual rate.4Office of the Law Revision Counsel. 26 USC 661 – Deduction for Estates and Trusts Accumulating Income or Distributing Corpus
The deduction is capped at Distributable Net Income, which is essentially the trust’s economic income for the year. DNI ceilings both the deduction the trust can claim and the amount taxable to the beneficiary. If a trust earns $30,000 of DNI and distributes $50,000, only $30,000 is deductible and only $30,000 is taxable to the beneficiary. The remaining $20,000 is a tax-free return of principal.
Simple trusts, which are required to distribute all income currently, use Section 651 and deduct an amount equal to the trust’s income for the year.5Office of the Law Revision Counsel. 26 USC 651 – Deduction for Trusts Distributing Current Income Only Complex trusts and estates use Section 661, which covers both required and discretionary distributions. Each beneficiary’s share is reported on Schedule K-1 of Form 1041.6Internal Revenue Service. About Form 1041, US Income Tax Return for Estates and Trusts
The 65-Day Election
Fiduciaries rarely know the trust’s exact taxable income until well after the year closes. Section 663(b) addresses that timing gap by allowing the fiduciary to treat distributions made in the first 65 days of a new tax year as if they were made on the last day of the prior year.7Office of the Law Revision Counsel. 26 USC 663 – Special Rules Applicable to Sections 661 and 662 For a calendar-year trust, distributions made by March 6 can be pulled back into the prior year’s return.
The election is made on Form 1041 for the year to which it applies, and it must be made fresh each year. The amount eligible can’t exceed the greater of the trust’s accounting income or DNI for the prior year, reduced by amounts already distributed during that year.
Exemptions in Place of a Standard Deduction
Trusts and estates don’t get a standard deduction. Section 642(b) gives them small fixed exemptions instead:8Office of the Law Revision Counsel. 26 USC 642 – Special Rules for Credits and Deductions
- Estates: $600
- Simple trusts, required to distribute all income annually: $300
- Complex trusts, all others: $100
Qualified disability trusts receive a much larger exemption. The base amount is $4,150, adjusted annually for inflation, and it replaces the standard $100 trust exemption. The higher figure exists because disability trusts typically serve beneficiaries who can’t benefit from distribution planning.
The exemption is applied after other allowable deductions to produce the taxable income that runs through the rate schedule. Given how small these amounts are relative to the bracket thresholds, they don’t change the tax picture much for most entities.
When These Rates Don’t Apply: Grantor Trusts
Not every trust is a separate taxpayer. When the grantor keeps enough control, the IRS disregards the trust for income tax purposes and the grantor reports all trust income on their personal return. The compressed brackets never come into play. Nearly all revocable living trusts work this way during the grantor’s lifetime.
Grantor trust status applies when the grantor retains the power to revoke, controls who benefits, or holds the right to receive income from trust assets. Some irrevocable trusts also qualify if the terms give the grantor enough retained interest. In practice, the trustee either gives payors the grantor’s Social Security number or files informational Forms 1099 showing the trust as payor and the grantor as recipient.9eCFR. 26 CFR 1.671-4 – Method of Reporting
When the grantor dies, a revocable trust becomes irrevocable and loses grantor trust status. From that point forward the trust is its own taxpayer, needs its own EIN, files Form 1041, and pays tax under the compressed brackets described above.10Internal Revenue Service. Get an Employer Identification Number Successor trustees are often surprised by the shift because the trust was invisible for tax purposes while the grantor was alive.