Distribute or Retain? Trust Income Calculator: the facts

1. A non-grantor trust reaches the 37 percent bracket at $16,000 of taxable income in 2026; a single person reaches it at $640,600, a couple at $768,700 (Rev. Proc. 2025-32). The 3.8 percent surtax on a trust's retained investment income begins at the same $16,000 (§ 1411(a)(2)).
2. Income the trust distributes is deducted by the trust and taxed to the beneficiary instead, up to distributable net income, and keeps its character on the way out (§§ 651, 652, 661, 662). Distributed interest is interest to the beneficiary; distributed dividends are dividends.
3. Example: $50,000 of dividends retained costs the trust $17,723 in tax and surtax; distributed to a single beneficiary with $60,000 of other income it costs $11,086. Distributing saves $6,637 this year.
4. The surtax follows the income too, but at the beneficiary's threshold, $200,000 single or $250,000 joint of modified adjusted gross income, rather than the trust's $16,000.
5. Capital gains are the exception: unless the trust instrument or state law puts them in distributable net income, they stay in the trust and are taxed there, at the trust's compressed thresholds.
6. The trustee's decision is not only tax: a distribution leaves the trust's protection and lands in the beneficiary's estate, creditors' reach, and divorce. The 65-day election lets a distribution made by early March count for the prior year (§ 663(b)).

Educational only, not investment, tax, or legal advice. Results are hypothetical estimates that vary with each use and over time and are not guaranteed accurate or complete. Using this tool creates no client relationship with Considerate Capital, and the site that linked here is not affiliated with it. By using it you agree to the tool terms.