Estates and trusts are taxed on the income they earn, just like everyone else. A deceased individual might have owned stocks, bonds, rental property, or other interest- and dividend-producing assets at the time of their death. These assets become "owned" by their estate when the individual dies. Any income generated by the assets after the death must be reported by the trust or estate.
The Income Tax Return for Estates and Trusts
Estates and trusts that generate income during the year are subject to tax rates set by the federal government. They're required to file IRS Form 1041, the U.S. Income Tax Return for Estates and Trusts. The tax brackets are adjusted each year for inflation, just as personal income tax brackets are.
Form 1041 isn't required if all income-producing assets pass directly to a beneficiary after death. This might be the case with real estate owned jointly with the right of survivorship or an individual retirement account (IRA) that passes directly to a spouse.
Trusts and estates can take certain deductions on their returns, just as other taxpayers can. They can claim a deduction for any asset that's transferred to a beneficiary.
Income distributions are reported on Schedule K-1, which is sent to the recipient. The IRS receives a copy as well. The asset is then reportable by the beneficiary as income after distribution.
Which Estates and Trusts Must File Form 1041?
Estates with a gross income of $600 or more for the tax year and those with any beneficiary who's a nonresident alien are required to file IRS Form 1041.
Trusts that have any taxable income at all, that have a gross income of $600 or more regardless of taxable income, or with any beneficiary who is a nonresident alien are required to file Form 1041 as well.
An estate must request a tax ID number in order to file these documents and to transact other business. The ID number is the employer identification number (EIN) regardless of whether the estate actually employs anyone. Estate executors can apply to the IRS for an EIN by mail, fax, or online.
Estate and Trust Income Tax Brackets
The Tax Cuts and Jobs Act (TCJA) changed income tax brackets across the board when it went into effect in January 2018, including those assigned to estate and trust income.
The TCJA also altered the inflation index that annually increases all tax bracket figures. The Internal Revenue Code previously adjusted bracket thresholds according to the Consumer Price Index (CPI). It uses the chained CPI under the terms of the TCJA, which is a bit more complicated. It generally results in a lesser inflation adjustment.
Below are the tax rates and income brackets that would apply to estates and trusts that were opened for deaths that occurred in 2021. They would apply to the tax return filed in 2022.
|Income Bracket||Tax Rate|
|$0 to $2,650||10% of income over $0|
|$2,650 to $9,550||$265 + 24% of income over $2,650|
|$9,550 to $13,050||$1,921 + 35% of income over $9,550|
|$13,050 or more||$3,146 + 37% of income over $13,050|
Income Taxes Aren't the Same As Estate Taxes
These tax rates and brackets shouldn't be confused with estate tax thresholds and exemptions. They apply only to income earned by trusts or estates before assets are transferred to beneficiaries. The estate tax applies to the estate's overall value and requires filing IRS Form 706, the U.S. Estate (and Generation-Skipping Transfer) Tax Return.
Only estates valued at more than $11.7 million were subject to the estate tax in 2021. This threshold is also indexed for inflation. It increases to $12.06 million for deaths that occur in 2022. The TCJA more or less doubled the estate tax exemption when it went into effect in 2018. These values may revert to pre-2018 levels (closer to $5 million) after 2025 when the TCJA expires unless Congress acts to renew its provisions.
- Estates and trusts are taxed on the income they earn and are required to file IRS Form 1041, the U.S. Income Tax Return for Estates and Trusts.
- Estates and trusts follow their own tax rates and income brackets, which are indexed for inflation each tax year.
- The tax rates and brackets are not the same as estate tax thresholds and exemptions. The tax rates and brackets only apply to income earned by trusts or estates before assets are transferred to beneficiaries.
Frequently Asked Questions (FAQs)
What is the difference between a trust and an estate?
A trust is a type of relationship or arrangement where a third party holds title to property or assets on behalf of a beneficiary. A trust can be formed under state law. It usually avoids probate. An estate is the term used for a person's property after they die. An estate may include a person's house, assets, personal items, and more.
What is the highest trust and estate tax rate?
The highest trust and estate tax rate is 37%. It applies to income of $13,050 or more for deaths that occurred in 2021. The tax rate works out to be $3,146 plus 37% of income over $13,050. IRS Form 1041 gives instructions on how to file.