Technical article
United States: What the Trust Pays Each Year, and When It Reaches the Top Rate
The trustee has two choices each year for that income.
Picture a family trust with US$4 million in stocks and bonds that earns about US$160,000 a year in dividends and interest. These are round example figures, not a forecast. The trustee has two choices each year for that income. Keep it inside the trust, or pay it out to the heirs.
The choice changes who pays the tax and at what rate. It also matters most for trusts that last for generations, because a trust that keeps income meets the top rate early.
The 2026 rates for a trust
A US trust that is not owned by its settlor pays income tax on its own return, Form 1041. The 2026 table is steep.
| Taxable income kept in the trust | Rate |
|---|---|
| Up to US$3,300 | 10% |
| US$3,300 to US$11,700 | 24% |
| US$11,700 to US$16,000 | 35% |
| Above US$16,000 | 37% |
On top of that, a trust pays a 3.8% investment tax on undistributed net investment income above the point where the top bracket starts, which is US$16,000 in 2026. It is reported on Form 8960. The 3.8% comes from a statute summary, and the US$16,000 link to the top bracket comes from the statute text.
In the example, US$160,000 of kept income lands almost entirely in the top bracket.
What changes when income is paid out
When the trust pays income to a beneficiary, the trust deducts it, and the beneficiary reports it, up to the amount of the trust's income for the year. The beneficiary receives a Schedule K-1 that shows what kind of income it was. Dividends stay dividends and interest stays interest.
For an heir who lives abroad and is not a US citizen, the payment may carry 30% withholding instead, which the next article in this series covers. Nonresident aliens are not charged the 3.8% investment tax, so the foreign heirs do not pay it.
A payment of principal still carries out the trust's income first. Only a fixed sum paid in no more than three installments escapes that rule.
Gains kept in the trust
Capital gains that the trustee adds to principal and does not distribute stay out of the amount passed to heirs. The trust pays tax on them itself. Because they are taxed at trust rates, a trust reaches the top rate quickly on retained gains.
For 2025, the instructions for Form 1041 put the 0% gain rate up to US$3,250 and the 15% rate up to US$15,900, with 20% above. Those are the 2025 amounts. For a trust that keeps its gains, the 20% rate starts at a small income.
A trust that the settlor is treated as owning is taxed differently. The settlor reports the income on their own return, so the trust's table does not apply.
You could
You could also ask a trustee how they decide between keeping and paying out, and how they record which part is income and which is gain.
If you hold a trust, or plan one, how do you think about keeping income inside it? Tell us here. Someone else may be weighing the same trade-off.
Figures are estimates for planning, based on public data. Date read: October 2026.
Sources
- IRS Rev. Proc. 2025-32 Table 5 (A)
- Cornell LII 26 USC 1411, 643, 652, 662, 663 and 674 (A)
- IRS Instructions for Form 1041 (A)
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