Trust Tax Rates: Federal Brackets, NIIT, and Distributions

Federal trust tax rates for 2026 top out at 37%, and a non-grantor trust reaches that rate once its taxable income passes $16,000. A single individual doesn’t hit 37% until income exceeds roughly $609,000.¹ That compression is deliberate. Congress built it to discourage parking income inside trusts, and the practical result is that any retained trust income above $16,000 is taxed at the same marginal rate as the highest-earning individuals in the country.

The 2026 Trust Tax Brackets

The IRS adjusts trust brackets for inflation each year. For the 2026 tax year, estates and non-grantor trusts pay tax on ordinary income under four brackets:¹

10% on taxable income up to $3,300
24% from $3,301 to $11,700 (tax of $330 plus 24% of the amount over $3,300)
35% from $11,701 to $16,000 (tax of $2,346 plus 35% of the amount over $11,700)
37% on taxable income over $16,000 (tax of $3,851 plus 37% of the amount over $16,000)

These rates apply to interest, business profits, short-term capital gains, and other ordinary income the trust keeps. Long-term capital gains and qualified dividends run on their own rate schedule.

Capital Gains and Qualified Dividends

Long-term gains and qualified dividends get preferential rates, but again the trust brackets are tightly compressed. For 2026:²

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

Short-term gains, meaning gains on assets held one year or less, get no preferential rate. They’re taxed as ordinary income and can hit 37% after just $16,000. Holding period matters enormously: selling an appreciated asset at 11 months versus 13 months can shift the top rate on the gain from 37% to 20%. Trustees planning a sale should check the acquisition date before pulling the trigger.

The 3.8% Net Investment Income Tax

Trusts pay an additional 3.8% surtax on net investment income under Section 1411.³ The tax applies to the lesser of the trust’s undistributed net investment income or the amount by which its adjusted gross income exceeds the threshold where the top ordinary bracket begins. For 2026 that threshold is $16,000, the same figure that starts the 37% bracket.¹

Net investment income covers interest, dividends, capital gains, rental income, royalties, and passive business income. Wages, active self-employment earnings, and Social Security benefits are not included. The surtax is reported on Form 8960.⁴ Because individual beneficiaries don’t face the NIIT until their income tops $200,000 (or $250,000 for joint filers), pushing investment income out of the trust often avoids the surtax entirely.

Which Trusts Actually Pay These Rates

Not every trust files its own return. Grantor trusts, including most revocable living trusts during the grantor’s lifetime, are ignored for income tax purposes. The trust’s income flows onto the grantor’s personal Form 1040 and is taxed at individual rates. The compressed trust brackets never apply.

Non-grantor trusts are separate taxpayers. They file Form 1041 and pay tax under the brackets above on income they retain. Two subtypes exist:

Simple trusts are required to distribute all income each year and cannot make charitable contributions from the trust. They receive a $300 exemption.⁵
Complex trusts have discretion to accumulate income, distribute principal, or make charitable gifts. They receive a $100 exemption.⁵

Both types use the same brackets. The distinction mainly affects how the distribution deduction works and how much flexibility the trustee has to shift income to beneficiaries.

Reducing the Tax Through Distributions

The single most effective lever a trustee has is the distribution deduction. When a non-grantor trust distributes income, the trust deducts that amount from its own taxable income, and the beneficiaries report it on their personal returns. Most beneficiaries have far more room in the lower individual brackets than the trust does, so the total federal tax paid on the same dollar of income usually falls.

The deduction is capped by Distributable Net Income, which also limits how much the beneficiary must report. The trust issues each beneficiary a Schedule K-1 showing their share.⁵

The 65-Day Rule

Trustees rarely know exact income figures by December 31. Section 663(b) provides a cushion. A distribution made within 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.⁶ For 2026, that window closes on March 6, 2027.

The election is made on the trust’s timely filed return, including extensions, and once made it’s irrevocable. The trustee can apply the election to all or part of the distributions made in the window. Missing this deadline is one of the more expensive administrative errors in trust practice.

The Section 199A Deduction

Non-grantor trusts that receive income from pass-through businesses may qualify for the Section 199A qualified business income deduction, worth up to 20% of qualified business income. The One Big Beautiful Bill Act, signed in July 2025, made the deduction permanent.

The deduction applies to income flowing from partnerships, S corporations, and sole proprietorships, but income from specified service businesses (law, medicine, accounting, financial services, and similar) phases out once the trust’s taxable income exceeds a threshold. For 2026, that threshold for trusts and single filers is $201,750. Above it, the service-business deduction phases out and eventually disappears.

Because trust income compresses into the top brackets so quickly, even a modest 199A deduction can meaningfully cut the effective rate. The deduction can also be allocated between the trust and its beneficiaries in proportion to how the income is distributed.

Filing and Estimated Payments

A domestic trust must file Form 1041 if it has any taxable income, gross income of $600 or more regardless of taxable income, or a beneficiary who is a nonresident alien.⁵ The $600 gross-income threshold catches many small trusts trustees assume are too small to bother with. A return may be required even when the trust owes no tax itself, because the IRS uses it to match up the K-1s beneficiaries received.

For calendar-year trusts, Form 1041 for 2026 is due April 15, 2027. An automatic extension pushes the filing deadline to September 30, 2027, but the tax itself is still due April 15.

If the trust expects to owe $1,000 or more after withholding and credits, the trustee must make quarterly estimated payments using Form 1041-ES. The 2026 due dates are April 15, 2026; June 15, 2026; September 15, 2026; and January 15, 2027. The fourth payment can be skipped if the trustee files the return by January 31, 2027, and pays the full balance with it.²

Penalties and Interest

The penalty structure for trust returns mirrors the individual side, and the dollar amounts compound quickly at a 37% marginal rate. Late filing runs 5% of unpaid tax per month, capped at 25%. Late payment runs 0.5% per month, also capped at 25%.⁷ When both apply in the same month, the filing penalty is reduced by the payment penalty, so they don’t fully stack.

Interest runs on unpaid tax from the original due date. For the quarter beginning April 1, 2026, the underpayment interest rate is 6%, compounded daily.⁸ The rate resets quarterly and cannot be abated for reasonable cause the way penalties sometimes can.

1
Internal Revenue Service. Rev Proc 2025-32
2
Internal Revenue Service. 2026 Form 1041-ES Estimated Income Tax for Estates and Trusts
3
Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
4
Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
5
Internal Revenue Service. Instructions for Form 1041 and Schedules A, B, G, J, and K-1
6
Office of the Law Revision Counsel. 26 USC 663 – Special Rules Applicable to Sections 661 and 662
7
Office of the Law Revision Counsel. 26 USC 6651 – Failure to File Tax Return or to Pay Tax
8
Internal Revenue Service. Internal Revenue Bulletin 2026-8