How is Trust Income Taxed in New Jersey?

Trusts are powerful estate planning tools, often used to protect assets, provide for loved ones, and manage wealth with clarity and purpose. But while they offer flexibility and control, trusts also come with important tax obligations—especially when it comes to Trust income.

If you live in New Jersey or have set up a trust within the state, it’s critical to understand how trust income is taxed both at the state and federal level. Whether you’re a trustee managing a trust or a beneficiary receiving distributions, knowing the tax treatment of trust income in New Jersey can help you avoid surprises and stay compliant.

The Simone Law Firm works with clients throughout New Jersey to navigate the legal and financial responsibilities tied to trusts. Below is a straightforward guide to how trust income is taxed in New Jersey and what trustees and beneficiaries need to consider.

What Is Trust Income?

Dividends and interest from investment accounts

Rental income from real estate

Business profits

who is responsible for paying those taxes—depends on the type of trust and how the income is distributed or retained.

Types of Trusts and Their Impact on Taxation

In general, trusts fall into two broad categories:

1. Revocable Trusts

Also known as living trusts, these are trusts that can be changed or revoked by the grantor (the person who created the trust) at any time during their lifetime.

Tax Treatment: For tax purposes, revocable trusts are treated as “grantor trusts.” That means the IRS and the New Jersey Division of Taxation view all trust income as belonging to the grantor. The grantor includes all income generated by the trust on their personal income tax return. As a result, the trust itself is not taxed separately while it remains revocable.

2. Irrevocable Trusts

These trusts are often used for long-term estate planning and asset protection.

Tax Treatment:

Irrevocable trusts are treated as separate tax entities. This means they must file their own tax returns and may be responsible for paying taxes on trust income—unless the income is distributed to beneficiaries, in which case the tax burden may shift to them.

Trust Income and Federal Taxes

At the federal level, irrevocable trusts must file IRS Form 1041 annually. The trust will pay income taxes on any income it retains, often at higher tax rates than individuals. For 2025, trust income exceeding just $15,200 is taxed at the highest federal rate of 37%.

If the trust distributes income to beneficiaries, that income is typically deductible to the trust and reportable by the beneficiary. 

How New Jersey Taxes Trust Income

New Jersey follows many federal rules but adds its own layer of complexity. Here’s what to know:

1. Resident vs. Nonresident Trusts

A resident trust in New Jersey is one where the grantor was a New Jersey resident at the time the trust became irrevocable, or if the trust is administered in New Jersey.

Nonresident trusts are generally taxed only on New Jersey-sourced income (such as rental property located in the state).

2. Filing Obligations

The federal return, the trust reports its income and calculates taxes owed. Trusts that distribute income to beneficiaries will also issue Schedule NJ-K-1 to each recipient, showing their share of taxable trust income.

3. Income Distribution and Tax Responsibility

If the trust distributes income to beneficiaries, then each beneficiary pays tax on their share of income—even if they live outside of New Jersey.

This makes it important for both trustees and beneficiaries to understand the source and treatment of the income they receive.

Planning Strategies for Trust Income Taxation

Managing trust income efficiently requires thoughtful planning. Some strategies that may help reduce the overall tax burden include:

1. Timely Income Distribution

This must be done with care to ensure all legal and financial responsibilities are met.

2. Invest in Tax-Efficient Assets

Some trusts benefit from holding assets that generate tax-free or tax-deferred income, such as municipal bonds or tax-advantaged retirement accounts (where permitted).

3. Location-Based Planning

Trustees may consider administering the trust outside of New Jersey if legally permissible, which could affect whether the trust is considered a resident trust and reduce exposure to state taxation.

Responsibilities of Trustees in New Jersey

If you’re serving as a trustee in New Jersey, it’s important to:

Track all income, gains, and losses generated by the trust

Maintain accurate records of income distributions

Final Thoughts:

Let The Simone Law Firm help families and fiduciaries throughout New Jersey understand the responsibilities that come with trusts—especially when it comes to tax matters. Whether you’re establishing a new trust or an existing one, they can guide you through the legal and financial implications to ensure everything is done properly.

Need Help Managing a Trust in New Jersey?

Reach out to The Simone Law Firm for personalized support on trust income taxation, estate planning, and fiduciary responsibilities. Their goal is to help you protect what matters and plan with confidence.