Trusts Hit the 37% Tax Bracket at Just $16,000 in 2026 — Here's How Trustees Can Avoid Overpaying

A bracket built for a different era

Most people are surprised to learn how little income it takes for a trust to reach the highest federal income tax bracket. Under the 2026 inflation adjustments in Revenue Procedure 2025-32, the brackets for trusts and estates are:

• 10% on income up to $3,300
• 24% on income from $3,300 to $11,700
• 35% on income from $11,700 to $16,000
• 37% on income over $16,000

Compare that to an individual filer, who doesn't reach the 37% bracket until taxable income passes roughly $640,600. A trust holding a modest, well-performing investment portfolio can cross into the top bracket almost immediately — often within the first few thousand dollars of interest, dividends, and capital gains for the year.

The September 15 estimated tax deadline

For calendar-year trusts, the third installment of 2026 estimated tax is due September 15, 2026. If a trust expects to owe $1,000 or more in tax for the year after credits and withholding, the trustee generally must make quarterly payments using Form 1041-ES to avoid an underpayment penalty.

There's one notable exception: a decedent's estate is not required to make estimated tax payments for any tax year ending less than two years after the date of death, under Section 6654(l)(2). Ongoing trusts don't get that grace period — the estimated tax rules apply from the start.

Mid-August, with two-thirds of the year's income already realized, is exactly the right time for a trustee to look at year-to-date income and decide whether the September payment — and the year-end tax bill behind it — can be reduced.

The most effective lever: getting income out of the trust

The compressed brackets apply to income the trust keeps. Income the trustee distributes to beneficiaries is a different story. Under the distributable net income (DNI) rules of Sections 651 and 661, a trust that distributes income to beneficiaries generally deducts those amounts, and the income carries out to the beneficiaries on Schedule K-1 to be reported — and taxed — on their own Form 1040s.

For most families, that's a significant advantage. A beneficiary who is a working adult in the 22% or 24% bracket, a retiree with modest income, or a student with little income of their own will almost always pay less tax on that same dollar of income than the trust would at 35% or 37%. The trust document and the trustee's fiduciary duties still govern whether and how much can be distributed — discretionary trusts give the trustee more flexibility than trusts that limit distributions to income only or restrict principal — but where distributions are permitted, shifting income to beneficiaries is usually the single biggest tax-saving move available.

The net investment income tax raises the stakes further

Trusts and estates are also subject to the 3.8% net investment income tax (NIIT) on undistributed net investment income once the trust's adjusted gross income exceeds the same $16,000 threshold that triggers the top bracket. That stacks the NIIT directly on top of the 37% rate for a combined federal rate of 40.8% on investment income retained above that level — reached at an income figure that many trusts clear before summer is over.

The 65-day rule is a safety net, not a plan

Section 663(b) allows a trustee to elect, by March 6, 2027, to treat distributions made in the first 65 days of 2027 as if made in 2026 instead. It's a useful tool for correcting course after year-end numbers are final, but it works best as a backstop — not a substitute for reviewing distributions now, while there's still time to plan around actual, not estimated, income for the year.

Bottom line

If a trust you administer is sitting on more income than you expected, September's estimated payment deadline is a natural checkpoint to ask whether a distribution before year-end would leave the family better off overall. This is exactly the kind of mid-year fiduciary accounting and tax planning we help trustees work through — reach out before the September 15 deadline if you'd like a second set of eyes on the numbers.