Trust Tax Brackets 2026: Form 1041, an Estate Rental and a K-1

The 2026 trust and estate brackets, next to the 2025 ones

An estate or trust does not use the table you use. Section 1(j)(2)(E) has its own, and Rev. Proc. 2025-32 prints it as Table 5 in section 4.01, for taxable years beginning in 2026 (section 5.02). The 2025 column comes from the Instructions for Form 1041 (Schedule G, line 1a).

Three readings that the top search results skip.

• The 37% bracket is 40 times closer. For 2026, a single individual reaches 37% at $640,600 and a married couple filing jointly at $768,700 (Tables 3 and 1 of the same section). An estate reaches it at $16,000. Ratio for a single filer: 640,600 divided by 16,000 is 40.0 (our arithmetic). A trust that sits on $100,000 of rent and interest pays 37% on $84,000 of it.
• The brackets rose by $350 at the top. From $15,650 to $16,000 is the whole 2026 indexation of the point that matters most (our arithmetic). The 2025 law (section 2.01 of the Rev. Proc.) kept the four rates and did not stretch the brackets.
• Fiscal-year estates can be on the old table. The Rev. Proc. applies section 4 to “taxable years beginning in 2026”. An estate with a fiscal year that began in 2025 and ends in 2026 files the 2025 return and uses the 2025 schedule (Instructions for Form 1041, Period Covered, our reading).

Exemptions, capital gains, AMT and the estate tax line

• Exemption deduction. 26 U.S.C. 642(b): an estate “shall be allowed a deduction of $600.” A trust gets $100, and a trust required to distribute all its income currently gets $300. It is not inflation-indexed, which is why a $600 estate and a $16,000 bracket sit side by side.
• Capital gains. The maximum zero rate amount for estates and trusts is $3,300 and the maximum 15% rate amount is $16,250 (section 4.03). Above $16,250 the rate is 20% under section 1(h) (our reading; the Rev. Proc. only lists the two ceilings). Our guide to capital gains tax on real estate in 2026 lays out the individual rates and the 25% rate on depreciation.
• AMT. The exemption for estates and trusts is $31,400, phased out between $104,800 and $167,600 (section 4.10).
• Estate tax is a separate system. The basic exclusion amount is $15,000,000 for 2026 (section 2.14, applying section 70106 of the 2025 law). It decides whether the estate owes estate tax, not how its income is taxed; see our 2026 estate tax exemption guide.

Who has to file Form 1041, and the IRS census of who does

The fiduciary files Form 1041 for a domestic estate with “Gross income for the tax year of $600 or more”, or with a nonresident alien beneficiary (Instructions for Form 1041, Who Must File). A domestic trust files with any taxable income, gross income of $600 or more, or a nonresident alien beneficiary. For an estate, the tax year can be any period ending on the last day of a month and not longer than 12 months (Publication 559).

The IRS publishes the only official census of these returns. Its tables for tax year 2022 (the latest) count 3,195,251 fiduciary returns.

What the table says (our reading):

• Estates distribute, complex trusts accumulate. Decedents’ estates deducted 38.2% of their income as distributions (10,544,536 divided by 27,637,460) and paid tax equal to 12.5% of it. Complex trusts deducted 26.8% and paid 24.0%.
• The “rents” line includes fund K-1s. The IRS column is “Rents, royalties, partnerships, other estates and trusts”, so it includes K-1 income from funds. For estates it is 14.1% of income; capital gains are another $10.15 billion, 36.7% (our arithmetic). The professional costs are visible too: $1.01 billion of fiduciary fees and $2.43 billion of attorney, accountant and preparer fees.
• Most returns pay nothing, and the top pays most. Of all 3,195,251 returns, 2,044,164 (64.0%) had taxable income of zero or less. Returns with $10 million or more of income were 2,844 and paid $121.60 billion of the $157.10 billion of tax, or 77.4% (our arithmetic).

The IRS highlights sheet (Publication 6174, July 2026) gives the headline: 3.2 million returns, $542.1 billion of income, $157.1 billion of tax, and decedents’ estates at 12.2% of returns.

One estate, one rental, one K-1: kept or distributed

Here is the calculation the top results do not show. The assumptions are ours and round; the arithmetic follows the 2026 table above. State tax, the qualified business income deduction and capital gains are ignored.

• An estate (calendar year 2026, a full 12 months, not subject to estimated tax) holds an inherited rental that took a stepped-up basis (see our step-up in basis guide) and an interest in a real estate fund that sends a K-1.
• Rental: $48,000 of rent, $17,000 of operating expenses, $6,000 of depreciation: $25,000 net on Schedule E.
• K-1 from the fund: $4,000 of interest and $8,000 of net rental real estate income: $12,000.
• Fees: $7,000 of fiduciary and attorney fees, deducted in full.
• Total income $37,000, less fees $7,000: distributable net income of $30,000 before the $600 exemption. All of it is net investment income.
• One beneficiary, an adult child, single, with other taxable income of $120,000, so 24% on this income and no NIIT of her own (our assumption).

How the first row is built: taxable income is $30,000 minus the $600 exemption, $29,400. The tax is $3,851 plus 37% of the $13,400 above $16,000, which is $8,809. The NIIT is 3.8% of the lesser of undistributed net investment income ($30,000) and the AGI above $16,000 ($29,400 minus $16,000, or $13,400), which is $509. On the Form 1041 the instructions define the estate’s AGI by subtracting administration costs, the income distribution deduction and the exemption from total income. Paying out $15,000 puts $14,400 in the estate; the tax is $2,346 plus 35% of the $2,700 above $11,700, or $3,291, and AGI is below $16,000, so there is no NIIT.

Three things to take from it.

1. Keeping income costs the most. At a 24% beneficiary, the best split saves $2,724 over keeping everything (9,318 minus 6,594).
2. Paying out everything is not the cheapest either. The estate’s first $3,900 (the $600 exemption plus $3,300 at 10%) costs less inside the estate than at 24%. Total $7,200 against $6,594 with a $3,900 to $12,300 residue left in the estate (our arithmetic).
3. The right split depends on the beneficiary’s bracket.

The last three rows assume the beneficiary is already over the $200,000 single-filer NIIT threshold (26 U.S.C. 1411(b)(3)), so the distributed income carries her own 3.8% (our assumption). The pattern: for a beneficiary at 32% or more, the estate should keep income up to the $16,000 point where its own 37% starts, and distribute the rest. For a beneficiary at 24% or less, distribute almost everything. This is arithmetic on assumed numbers, not a recommendation; the trust or will, state law and the beneficiaries’ own situations decide what a fiduciary may do.

How distributions carry income out

Three Code sections do the work.

• The estate’s deduction. 26 U.S.C. 661(a) allows a deduction for income required to be distributed currently and for “any other amounts properly paid or credited or required to be distributed”, but “such deduction shall not exceed the distributable net income of the estate or trust.”
• The beneficiary’s inclusion. Section 662(a) puts those amounts in the beneficiary’s gross income, in the same proportion as DNI, and 661(b) says the amount keeps its character: a distribution consists of the same proportion of each class of income as the total of each class bears to DNI. The child in our example receives rent and interest income in the same proportions as the estate earned them.
• What DNI is. Section 643(a): the taxable income of the estate, computed with no distribution deduction and no exemption, and with capital gains excluded to the extent they are allocated to corpus and not paid out. A sale of the inherited rental therefore stays in the estate’s own tax, unless it is distributed or set aside for charity.

The specific bequest exception. Handing a child the house itself usually does not carry income out. Section 663(a)(1) excludes “a gift or bequest of a specific sum of money or of specific property” if “paid or credited all at once or in not more than 3 installments”. The Form 1041 instructions repeat it for the distribution lines. So leaving the rental to a named child is not a distribution of DNI; it is a transfer of the asset, and the rent after the transfer is the child’s.

On the Schedule K-1 (Form 1041) the beneficiary’s share arrives split by tax character: box 5 for other portfolio and nonbusiness income, boxes 6 through 8 for ordinary business income, rental real estate and other rental income, box 9 for directly apportioned deductions, and box 14 code H for net investment income distributed (Instructions for Form 1041). That is a different form from the Schedule K-1 (Form 1065) that a fund sends the estate; our K-1 box guide for real estate funds explains the fund side. On the 1041 itself, the instructions say to use “the corresponding lines on Form 1041 to report the interest, dividends, capital gains, etc., from the flow-through entity.”

The 65-day election: January and February payments count for last year

An estate can look back. Section 663(b)(1): if “within the first 65 days of any taxable year of an estate or a trust, an amount is properly paid or credited, such amount shall be considered paid or credited on the last day of the preceding taxable year.” Section 663(b)(2) makes it an election by the executor.

• Who: the executor of an estate, or the fiduciary of a complex trust (Instructions for Form 1041, Question 6). A simple trust is not eligible by the instructions’ wording.
• How: check the box in Question 6 of Other Information. Treasury Regulation 1.663(b)-2(a)(1) says it “shall be made not later than the time prescribed by law for filing such return (including extensions thereof)” and that it “shall become irrevocable after the last day prescribed for making it.”
• The day count for the 2026 return: the first 65 days of 2027 end on March 6, 2027, a Saturday (our count), so a check cleared by Friday, March 5, 2027 is the safe reading. The deduction is still capped at the 2026 DNI (661(a)).
• Why it matters in our example: in March 2027 the executor knows the final numbers for 2026 (a fund K-1 may arrive after the year ends). The election lets her pay out exactly the amount that fills the estate’s low brackets, without having guessed in December.

Amounts treated as 2026 payments do not count again in 2027 (section 663(a)(3)). The 2025 instructions we read apply to 2025 returns; the 2026 Form 1041 instructions are the ones to check when they publish.

The section 645 election: a revocable trust joins the estate

When someone with a revocable trust dies, the trust becomes a separate taxpayer with its own return. Section 645(a) lets the executor and the trustee elect that the trust be “treated and taxed as part of such estate (and not as a separate trust)”. The pieces, from the Form 1041 instructions and the statute:

• Form 8855, “must be filed by the due date for Form 1041 for the first tax year of the related estate” and “Once made, the election is irrevocable.”
• How long: the election period ends on the earlier of the day all assets are distributed or the “applicable date”: 2 years after death if no Form 706 is required, or, if one is required, the later of 2 years after death or 6 months after the final determination of estate tax (26 U.S.C. 645(b)(2) and the instructions). With the exclusion at $15,000,000 for 2026, most estates will not need a Form 706 (our reading).
• What the estate gets: the trust is “treated and taxed as part of such estate” for the subtitle (section 645(a)), so one set of brackets applies, the instructions give the electing trust a single $600 exemption, and, in our reading, the estate-only rules below (the 2-year passive loss allowance and the estimated tax holiday) cover its rental and K-1 income too.
• Even without a section 645 election, every qualified revocable trust must obtain a new taxpayer identification number after the death (instructions).

The election is a tax-year decision with consequences for the whole fiduciary team. Whether a trust should join an estate, and when to end the combination, is a question for the estate’s attorney and accountant.

Choosing a fiscal year for the estate

Publication 559: “The personal representative chooses the estate’s accounting period upon filing the first Form 1041. The estate’s first tax year can be any period that ends on the last day of a month and doesn’t exceed 12 months.” Once chosen, it cannot be changed without IRS approval.

The reason to care is timing. Under Publication 559, each beneficiary includes the estate’s income “in the beneficiary’s return for the tax year in which the last day of the estate’s tax year falls.” In our illustration (our arithmetic): the owner died on March 10, 2026. A fiscal year ending February 28, 2027 gives the estate a first tax year of almost 12 months, and the DNI distributed from March 2026 through February 2027 lands on the child’s 2027 return, not 2026. A calendar year would have put the March to December 2026 part on her 2026 return. That is a deferral of up to about 10 months of income for those distributions. Once chosen, the year cannot be changed without IRS approval.

Two practical points: a fiscal-year estate files by the 15th day of the 4th month after year-end (the instructions give June 30 year-end and an October 15 due date as an example), and a short first year does not cut the $600 exemption (Publication 559). The 645 rule also helps here: if there is no executor, the trustee of an electing trust “can choose a fiscal year as the trust’s tax year during the election period” (Form 1041 instructions).

Depreciation, passive losses and the first two years

Depreciation is the same deduction as before, restarted on the stepped-up basis. For the rental inside an estate it is claimed in the estate’s Schedule E. When income is distributed, the Form 1041 instructions say that estates and trusts “are allowed to apportion depreciation, depletion, and amortization deductions to the beneficiaries” as directly apportioned deductions on the K-1. Treasury Regulation 1.642(e)-1: the estate gets the deduction “only to the extent the deductions are not apportioned to beneficiaries.” A fiduciary who distributes all income therefore passes the depreciation along with the rent.

Passive losses are tested at the estate first: “These limitations are first applied at the estate or trust level,” and “Generally, rental activities are passive activities, whether or not the taxpayer materially participates.” The special rule: “For tax years of an estate ending less than 2 years after the decedent’s date of death, up to $25,000 of deductions and deduction equivalents of credits from rental real estate activities in which the decedent actively participated are allowed” (26 U.S.C. 469(i)(4)(A); the instructions). Anything above that is suspended and carried forward. Our guide to the $25,000 passive loss allowance and Form 8582 covers the phase-out; section 469(i)(4)(B) has the surviving-spouse reduction.

Estimated tax. The estimated tax rules in the Form 1041 instructions say payments “aren’t required from” “A decedent’s estate for any tax year ending before the date that is 2 years after the decedent’s death”. After that, an estate or trust must pay if it expects to owe at least $1,000 for 2026.

A sale of the rental inside the estate. If the estate sells the property before distributing it, the gain over the stepped-up basis is taxed at the estate level (the 0/15/20% ceilings above) unless it is distributed; see our depreciation recapture guide for the part that is not wiped out.

Holding fund interests with K-1s in an estate

For a REIT, BDC or limited partnership interest that sends a Schedule K-1 (Form 1065):

• The estate reports the K-1 on the Form 1041 flow-through lines. A partnership interest takes a basis equal to the value at death, but the partnership’s own asset basis moves only with a section 754 election (see our step-up guide).
• Publication 559: “The death of a partner closes the partnership’s tax year for that partner.” The decedent’s final return takes his share of partnership items up to the date of death, and the estate takes the rest. Ask the sponsor for the date-of-death split.
• Income from the fund may be passive, portfolio or net investment income. Those categories continue onto the beneficiary’s K-1 (boxes 5 through 8) and decide whether the beneficiary’s own passive losses can use it.
• A fund K-1 may arrive after the year ends. That is a reason to know about the 65-day election and the extended due date: Form 7004 gives an automatic 5 1/2-month extension (Publication 559).
• For what counts as net investment income on the beneficiary’s side, see our guide to the net investment income tax in real estate.

What a reader can do with this

• Gather the two numbers first. Projected income for the estate’s tax year (rent, interest, K-1 income) and the fees you expect. Without them, nobody can compute distributable net income or choose a split.
• Mark the year-end. Put the last day of the estate’s tax year and the 65th day after it in the executor’s calendar. For a calendar-year estate in 2026 those are December 31, 2026 and March 6, 2027.
• Ask the beneficiaries their bracket. The table above changes with it. A child at 12% and one at 35% need different answers from the same estate.
• Decide on the fiscal year and on section 645 before the first return, not after. Both are close to irrevocable.
• Request the fund’s K-1 timeline in writing and ask whether the sponsor will estimate the date-of-death split.

A fiduciary who holds a rental and fund interests for a family is making a tax decision that the attorney who drafted the documents and a CPA who files Form 1041 have to sign off on.

FAQ

Sources, read and saved on October 20, 2026: Rev. Proc. 2025-32 (sections 2.01, 2.14, 4.01 Tables 1, 3 and 5, 4.03, 4.10 and 5.02), irs.gov; Instructions for Form 1041 and Schedules A, B, G, J and K-1 (2025) and Instructions for Form 8960 (2025), irs.gov; IRS Publication 559 (2025); 26 U.S.C. 469, 642, 643, 645, 661, 662, 663 and 1411 (Legal Information Institute and GPO text); Treasury Regulations 1.642(e)-1, 1.645-1 and 1.663(b)-2; IRS Statistics of Income, Fiduciary Income Tax Returns Tables 1 and 2 for tax year 2022 (22fd01.xlsx and 22fd02.xlsx) and Publication 6174 (July 2026). Tax divided by income ratios, bracket arithmetic and the worked example are our arithmetic with the assumptions stated. This is analysis of public documents, not investment, legal or tax advice.