Updated October 5, 2026. Quick answer: Yes. Vermont taxes trust income at graduated rates of 3.35% to 8.75% on the 2025 Form FIT-161 tax schedule, and the instructions say “A Form FIT-161 must be filed for every estate and trust”, subject to the federal Form 1041 filing condition and the Vermont income thresholds.
How Vermont treats trust income
| Item | What the documents say |
|---|---|
| Treatment | Vermont imposes its income tax on estates and trusts through 32 V.S.A. 5822, and trust returns are filed on Form FIT-161, the Vermont Fiduciary Return of Income. In the source’s words, “by every individual, estate, and trust” is the statutory description of who owes the tax, which applies to taxable income subject to federal income taxation. |
| Who counts as a resident trust | The 2025 instructions define a Vermont trust by the settlor, not by the trustee or beneficiary, and the statute defines residency for a trust through the domicile of the person whose property is in it (32 V.S.A. 5811(11)(B)): a trust, or portion of a trust, holding property transferred by will or by a decedent domiciled in Vermont at death, or property of a person domiciled in Vermont when it was transferred or when the trust became irrevocable; a resident trust is one that so qualifies for the entire taxable year. The instructions say a trust is a Vermont trust if “the settlor was a Vermont resident when the trust became irrevocable” or, for a still revocable trust, if the settlor was a Vermont resident when it was created, or if the settlor was domiciled in Vermont at death. |
| Rate on trust income | The 2025 Vermont tax schedule printed on Form FIT-161 taxes taxable income up to $3,300 at 3.35%, the next band up to $7,750 at 6.60% plus $111.00, the band up to $11,900 at 7.60% plus $404.00, and income over $11,900 at 8.75% plus $720.00. |
| Distribution deduction | Vermont starts from federal taxable income on Form 1041, Line 23, so any federal distribution deduction is already reflected, and the form asks whether distributions reported on Line 18 went to nonresident beneficiaries. The instructions do not set out a separate Vermont distribution deduction rule, but one note says that when U.S. interest is “distributed on federal Form 1041, Line 18, the deduction is lost” for the Vermont subtraction. |
| Nonresident trusts | A nonresident estate or trust is taxed on Vermont income, defined as listed items to the extent they are included in federal adjusted gross income. The first listed item is “Rents and royalties from ownership of property located in Vermont” and the list also covers Vermont property gains, services performed in Vermont, Vermont business income and Vermont lottery or gambling winnings. |
| Return to file | Resident and nonresident trusts file Form FIT-161 with a copy of federal Form 1041 attached, and nonresident or part-year filers complete Schedule FIT-166, Part III, to set the income adjustment percentage on Line 10. The form says to “File this return no later than the 15th day of the fourth” month following the close of the operating or income year. |
| Grantor trusts, ESBTs and settlement funds | The instructions treat several trust types separately. For electing small business trusts, the instructions say a Vermont fiduciary return “must also be filed for an Electing Small Business Trust” required to file federal Form 1041, a grantor trust fiduciary files Form FIT-161 as an information return with Schedule K-1VT-F, and the form states a qualified settlement fund pays 8.95% of taxable income. |
| Credit for tax paid to another state | Full-year and some part-year resident estates and trusts may claim a credit for income tax paid to another state or Canadian province by completing Schedule FIT-167 and entering the result on Line 12 of Form FIT-161. |
A $10,000 example
The tax on $10,000 of taxable income a trust keeps depends on the bracket it lands in. Taxed wholly at the lowest printed rate, 3.35%, the tax is computed as $10,000 x 3.35% = $335; taxed wholly at the highest, 8.75%, it is computed as $10,000 x 8.75% = $875. The state’s own schedule decides which applies. 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
The latest documents read print no 2026 change to how trust income is taxed.
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 Vermont taxes retirement income, whether Vermont taxes pensions, what a living trust costs in Vermont, federal trust tax brackets, and trust income tax by state.
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Answer againSources
- 2025 Form FIT-161 Instructions, Fiduciary Return of Income (Vermont Department of Taxes): https://tax.vermont.gov/sites/tax/files/documents/FIT-161-Instr-2025.pdf
- 2025 Form FIT-161, Vermont Fiduciary Return of Income (Vermont Department of Taxes): https://tax.vermont.gov/sites/tax/files/documents/FIT-161-2025.pdf
- 32 V.S.A. 5822, Tax on income of individuals, estates, and trusts (Vermont General Assembly): https://legislature.vermont.gov/statutes/section/32/151/05822
- 32 V.S.A. 5811, Definitions (Vermont General Assembly): https://legislature.vermont.gov/statutes/section/32/151/05811
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.