For decades a nongrantor trust that distributed all of its distributable net income could stop worrying about its own income tax. The Joint Committee on Taxation's explanation of the 2025 tax law puts that assumption in doubt. The new section 68 trims two thirty sevenths of a top bracket taxpayer's itemized deductions, the provision that excluded trusts was repealed, and a footnote in the Blue Book treats the trust's distribution deduction as an itemized deduction subject to the haircut.
The arithmetic: $100 of trust income fully distributed, about $5.41 of the deduction disallowed, about $2 of tax at the trust, $37 at the beneficiary, roughly 39 percent combined before the net investment income tax and state tax. The reading is contested, because it taxes part of the income twice and conflicts with the conduit principle of Subchapter J, and Treasury has not ruled. Until it does, trustees should revisit bracket planning, distribution timing, grantor versus nongrantor status and state tax exposure.
The full piece is at turnipseed.law.
