Updated July 28, 2026. Quick answer: If the trust is a grantor trust, IRC §671 taxes the income to the grantor and the trust owes nothing itself. If it is a non-grantor trust, the trust is a separate taxpayer with its own return and its own severely compressed brackets. Nearly every other trust tax question depends on which of these you have.
The two worlds
| Grantor trust | Non-grantor trust | |
|---|---|---|
| Who reports the income | The grantor, on their own return | The trust |
| Which brackets | The grantor’s individual brackets | Compressed trust brackets |
| Does the distribution decision matter for tax? | No | Yes, substantially |
Every revocable living trust is a grantor trust. A trust the settlor can revoke falls under §676, so it files no separate income tax return and changes nothing about how the settlor is taxed while they are alive. If you have a revocable living trust and were expecting tax consequences from it, there are none on the income side — that is not what it is for.
Grantor status is often deliberate
The grantor trust rules in §673 through §677 were written to stop taxpayers shifting income while keeping control. Modern planning frequently triggers them on purpose, because having the grantor pay the trust’s tax lets the trust assets grow without being reduced by tax — which is a transfer to the beneficiaries that is not itself a gift. The usual switch for turning it on is the substitution power.
One trigger worth knowing because it catches people accidentally: a reversionary interest worth more than 5% of the transferred property, measured at inception, makes the trust a grantor trust under §673.
No dollar amounts appear on this page. The trust rate brackets are adjusted annually, and the trust threshold for the net investment income tax is not a fixed figure at all — IRC §1411(a)(2)(B)(ii) ties it to the start of the top trust bracket, so it moves every year. Take current figures from the IRS revenue procedure for the year in question.
Sources
IRC §1(e) and §1(j) (as made permanent by P.L. 119-21); §641; §643(a); §644; §651 and §661 (distribution deduction); §663(b) and Treas. Reg. §1.663(b)-2; §671 and §673–677 (grantor trust rules); §675(4)(C) (substitution power); §1411(a)(2) and (b) (net investment income tax); Rev. Rul. 2008-22. North Carolina Dept. of Revenue v. Kaestner Family Trust, 588 U.S. 262 (2019). All read July 2026.
This states what the cited authority says. It is not tax advice, and retirement-plan design turns on facts about your business and your other entities that no page can see. Every dollar limit referenced here is indexed and changes annually.