Updated October 5, 2026. Quick answer: Sometimes. North Carolina taxes a trust’s income when the income is “for the benefit of a resident of this State” or comes from North Carolina property or business.
How North Carolina treats trust income
| Item | What the documents say |
|---|---|
| Treatment | North Carolina taxes trusts under its estates and trusts income tax, which follows the federal taxable income of the trust with North Carolina adjustments. The source says: “applies to the taxable income of estates and trusts”. |
| Who counts as a resident trust | The statute does not use a settlor or trustee residence test. It taxes trust income that is “for the benefit of a resident of this State” and the instructions warn that undistributed income for an in-state beneficiary may be beyond the state’s reach under Kaestner. |
| Rate on trust income | The trust is taxed at the individual rate in G.S. 105-153.7, which prints 4.25% for taxable years beginning in 2025. The source says: “at the rate levied in G.S. 105-153.7”. |
| Distribution deduction | Income passes through to beneficiaries, and North Carolina adjustments are split between the trust and beneficiaries by distributions made in the year. The source says: “conduit rule for taxing estates and trusts is applicable”. |
| Nonresident trusts | For a nonresident beneficiary, the tax reaches only income that “is derived from North Carolina sources and is attributable to the ownership” of real or tangible personal property in the State, or income from a business carried on in the State. |
| Return to file | The fiduciary files Form D-407 when the trust has North Carolina income or income for a resident beneficiary; a trust that is entirely a grantor trust for federal purposes need not file. The source says: “A fiduciary must file Form D-407, Estates and Trusts Income Tax Return”. |
| Court limit on taxing undistributed income | The Department’s instructions cite the Supreme Court’s Kaestner decision, which held that “in-state beneficiaries alone does not empower a state to tax trust income” that has not been distributed to beneficiaries with no right to demand it. |
A $10,000 example
A trust with $10,000 of taxable income that it keeps, rather than distributes, is taxed at 4.25%, computed as $10,000 x 4.25% = $425, before any deduction or exemption the state allows. Federal tax on the trust’s income still applies.
Income the trust passes out to a beneficiary is handled as the distribution deduction row above describes.
What changes in 2026
For taxable years beginning after 2025, G.S. 105-153.7 prints an individual rate of 3.99%, which G.S. 105-160.2 applies to trusts.
Federal rules
The state’s treatment sits on top of the federal one. The federal brackets a trust faces are laid out in trust tax brackets versus individual brackets, and capital gains that a trust keeps are covered in capital gains stay in the trust. The IRS explains the federal return in the About Form 1041 page.
Related: how North Carolina taxes retirement income, whether North Carolina taxes pensions, what a living trust costs in North Carolina, trust income tax by state, and federal trust tax brackets.
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Answer againSources
- North Carolina G.S. 105-160.2, Imposition of tax (North Carolina General Assembly): https://www.ncleg.gov/EnactedLegislation/Statutes/PDF/BySection/Chapter_105/GS_105-160.2.pdf
- 2025 Form D-407A, Instructions for Estates and Trusts Income Tax Return (North Carolina Department of Revenue): https://www.ncdor.gov/tax-forms/2025-d-407a-instructions-estates-and-trusts-income-tax-return/open
- North Carolina G.S. 105-153.7, Individual income tax imposed (North Carolina General Assembly): https://www.ncleg.gov/EnactedLegislation/Statutes/PDF/BySection/Chapter_105/GS_105-153.7.pdf
- North Carolina G.S. 105-160.4, Credits for income taxes paid to other states by estates and trusts (North Carolina General Assembly): https://www.ncleg.gov/EnactedLegislation/Statutes/PDF/BySection/Chapter_105/GS_105-160.4.pdf
Sources: the primary documents linked above, read on October 5, 2026. General information, not tax advice. Your own facts decide the outcome, and a preparer, the plan administrator or the agency itself is the right place to confirm anything consequential.