Updated July 28, 2026. Quick answer: A non-grantor trust reaches the top federal rate at a fraction of the income an individual needs — the thresholds differ by more than an order of magnitude. That compression, set by IRC §1(e), is the single fact that drives almost every decision about whether a trust should distribute its income or accumulate it.
Why the compression exists and what it costs
The trust rate schedule runs through the same rates as the individual one, but the brackets are compressed into a very small band of income. Income an individual would have taxed in a low bracket is taxed at the top rate inside a trust.
The consequence: for most trusts, income taxed inside the trust is taxed at the highest possible rate, while the same income taxed to a beneficiary is usually taxed at a much lower one. That is what the distribution deduction exists to exploit, and it is why trustees think about distributions as a tax decision rather than only a beneficiary-support decision.
A change most planning content has not absorbed
The §1(j) rate structure was scheduled to expire after 2025. It was made permanent by P.L. 119-21. A great deal of trust planning material still assumes a sunset and a reversion to the prior schedule. That assumption is now wrong, and it affects any plan built around waiting for rates to change on their own.
What does not follow from this
That every trust should distribute everything. A trust exists for reasons that are usually not tax reasons — protecting a beneficiary, controlling timing, keeping assets out of reach. Distribution solves the tax problem by handing the money over, which is sometimes exactly what the trust was created to avoid. The compression is a cost to weigh, not an instruction.
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.