New York Trust Tax: Residency, Rates, and Form IT-205

New York trust tax applies whenever a trust is classified as a New York resident under Tax Law Section 605(b)(3) or earns income from New York sources, with resident-trust rates ranging from 3.90% to 10.90% on income the trust retains. Whether your trust owes anything depends on who created it, where that person was domiciled, and whether the trust meets a narrow three-part exemption. Even trusts that owe nothing often still have to file.

Is Your Trust a New York Resident Trust

Residency turns on the creator, not the trustee and not the assets. A testamentary trust is automatically a resident trust if the person who wrote the will was domiciled in New York at death. An inter vivos trust is a resident trust if the person who funded it was a New York domiciliary either when the property was transferred to an irrevocable trust or when a previously revocable trust became irrevocable.¹

That classification sticks. A trust funded by a New York resident stays a New York resident trust even if the trustee later moves to Florida and every asset is invested in California. The location of the trustee and the location of the corpus do not change the answer.²

A trust that fails the residency test is a nonresident trust for New York purposes. Nonresident trusts are taxed only on New York source income, discussed further below.

The Three-Part Exemption for Resident Trusts

Section 605(b)(3)(D) lets a resident trust escape New York income tax entirely if it meets all three conditions in the same tax year:

Every trustee is domiciled outside New York.
The entire trust corpus, including real and tangible personal property, is located outside New York. The Department of Taxation and Finance treats intangible assets not used in a New York business as not “located” in the state for this test.
All income and gains come from sources outside New York, evaluated as if the trust were a nonresident.

If a single condition fails during the year, the exemption is gone for that entire year and the trust owes tax on all of its income.³

Exempt does not mean invisible. Since 2010, an exempt resident trust that meets the general filing threshold must still file Form IT-205 and attach Form IT-205-C certifying that all three conditions are satisfied. Skipping the certification is a common trigger for inquiries from the Department of Taxation and Finance, because from the state’s perspective a resident trust filed federally and went silent in New York.²

2026 Rates on Retained Trust Income

For tax years beginning in 2026 and before 2027, New York applies this schedule to resident estates and trusts:

Up to $8,500: 3.90%
$8,500 to $11,700: $332 plus 4.40% of the excess over $8,500
$11,700 to $13,900: $473 plus 5.15% of the excess over $11,700
$13,900 to $80,650: $586 plus 5.40% of the excess over $13,900
$80,650 to $215,400: $4,191 plus 5.90% of the excess over $80,650
$215,400 to $1,077,550: $12,141 plus 6.85% of the excess over $215,400
$1,077,550 to $5,000,000: $71,198 plus 9.65% of the excess over $1,077,550
$5,000,000 to $25,000,000: $449,714 plus 10.30% of the excess over $5,000,000
Over $25,000,000: $2,509,714 plus 10.90% of the excess over $25,000,000

These rates apply only to income the trust retains. Income properly distributed to beneficiaries flows out through the distribution deduction and is taxed on the beneficiary’s own return.⁴

How Fiduciary Taxable Income Is Built

The starting point is federal taxable income from the trust’s Form 1041. New York then applies state-specific modifications. The common ones: add back interest income from bonds of other states that was excluded federally; subtract interest from U.S. government obligations, which New York exempts; and add back state and local income taxes that were deducted federally. The rate schedule then runs against the modified figure.

The Federal Compression Behind the State Bill

Federal trust brackets are far tighter than individual brackets. For 2026, retained ordinary income above $16,000 is taxed at 37%, and long-term capital gains hit the 20% rate above $16,250. Combined with the New York rate schedule, a trust that retains even modest investment income can face an effective rate above 45%.⁵ That compression is why distribution timing is often the single largest planning decision a trustee makes.

New York City

A trust classified as a New York City resident trust owes an additional city income tax on top of the state tax. City residency for a trust follows rules similar to the state’s, keyed to the creator’s domicile. Taxable income is defined under NYC Administrative Code Section 11-1718, starting from federal taxable income with city-specific modifications. Fiduciaries with any city connection should build the city tax into their estimated payment calculations.

When a Nonresident Trust Owes New York Tax

A nonresident trust files Form IT-205 when it has both New York source income and New York adjusted gross income.⁶ Source income includes:

Income from any interest in New York real property, including gains from selling an interest in an entity where at least 50% of its assets consist of New York real property or cooperative housing shares.
Income tied to tangible personal property physically located in New York.
Income from a business, trade, or profession carried on in New York, including intangible property income to the extent the intangibles are used in a New York business.
Compensation for services performed in New York.
New York lottery winnings over $5,000, and gambling winnings over $5,000 from wagers placed in the state.

Passive investment income from stocks, bonds, and other intangibles is generally not New York source income for a nonresident trust unless those intangibles are used in a New York business. A nonresident trust holding a diversified securities portfolio, with no New York real estate or business, typically owes the state nothing.⁶

Incomplete Gift Non-Grantor (ING) Trusts

New York specifically targets a planning structure in which a resident funds a trust in a no-income-tax state so the transfer is incomplete for federal gift tax but complete for federal income tax, shifting investment income out of New York’s reach. Tax Law Section 612(b)(41) closes this by requiring the income of an ING trust to be included in the grantor’s New York adjusted gross income, as if the trust were a grantor trust for state purposes.⁷

The statute reaches any resident trust where the grantor’s transfer is treated as an incomplete gift under federal gift tax rules and the trust does not qualify as a federal grantor trust. Practically, a New York resident who funds an ING trust reports all of its income, gains, and losses on their own state return. It does not matter that the trust has its own EIN, files its own federal return, or sits in Nevada.⁸

Filing Form IT-205

A New York resident trust files Form IT-205 if it is required to file a federal income tax return, had any New York taxable income for the year, or is subject to the separate tax on lump-sum distributions. Nonresident trusts file when they have New York source income combined with New York adjusted gross income. Exempt resident trusts that meet the general threshold file Form IT-205 and attach Form IT-205-C.⁶

To complete the return you’ll need the trust’s federal EIN, the federal Form 1041 as the starting point, a breakdown of any New York source income, and each beneficiary’s share of distributable income. Electronic filing through the Department of Taxation and Finance is the preferred method.

Deadline and Extension

Calendar-year trusts file by April 15. An automatic 5½-month extension is available by submitting Form IT-370-PF on or before the original due date, moving the return deadline to September 30. The extension covers filing only. Tax owed must be paid by April 15, or interest accrues from that date regardless of the extension.⁹

Estimated Tax Payments

A trust must make quarterly estimated payments on Form IT-2106 if it expects to owe at least $300 in combined state, New York City, or Yonkers income tax for the year after withholding and credits, and expects withholding and credits to cover less than the smaller of 90% of current-year tax or 100% of prior-year tax. For trusts with prior-year New York adjusted gross income above $150,000, the prior-year safe harbor rises to 110%.¹⁰

The 2026 due dates are April 15, June 15, September 15, and January 15, 2027. Estates get a pass on estimated payments for the tax year of the decedent’s death and the following year, and certain trusts treated as owned by the decedent that receive the residue of the estate also qualify for that temporary exemption.⁶

A trustee can also elect to allocate part or all of the trust’s estimated tax payments to beneficiaries. The election must be made within 65 days after the close of the trust’s tax year, and the allocated amount is treated as a beneficiary payment on January 15 following the trust’s year-end, which can help beneficiaries meet their own obligations.¹¹

Penalties and Interest

Late filing costs 5% of the unpaid tax per month or partial month, up to 25%. If the return is more than 60 days late, the minimum penalty is the lesser of $100 or the total tax due.¹²

Underpayment of estimated tax carries a separate penalty at the underpayment interest rate set by the Department, applied to each quarter’s shortfall for the period it remained unpaid. No penalty applies if the trust’s total tax for the year is under $300. Meeting either the 90% current-year or the applicable prior-year safe harbor through timely quarterly installments avoids the penalty.¹¹ Interest on unpaid tax runs from April 15 in all cases, extension or not.

Throwback Tax on Accumulation Distributions

New York recaptures income that piled up inside an exempt resident trust during years when no state tax was paid. When that accumulated income is later distributed to a New York beneficiary, the beneficiary adds it to their own taxable income, and the calculation applies the rates that would have applied had the trust been taxable in the accumulation years. That process often spans multiple years with different rate schedules, so beneficiaries receiving sizable accumulation distributions should work with a tax professional who can allocate the income across the correct prior years.

The upshot for planning: the exempt-trust rule defers New York tax rather than eliminating it. Trustees who distribute income currently, especially to beneficiaries in lower brackets, often produce a lower combined tax bill than trustees who let income accumulate.

1
New York State Senate. New York Code TAX 605 – General Provisions and Definitions
2
New York State Department of Taxation and Finance. TSB-M-10(5)I – Filing Requirement for Resident Trusts Not Subject to Tax
3
Legal Information Institute. N.Y. Comp. Codes R. and Regs. Tit. 20 105.23 – Resident Estate or Trust
4
New York State Senate. New York Code TAX 601 – Imposition of Tax
5
Internal Revenue Service. Estimated Income Tax for Estates and Trusts
6
New York State Department of Taxation and Finance. Instructions for Form IT-205 Fiduciary Income Tax Return
7
New York State Senate. New York Code TAX 612 – New York Adjusted Gross Income of a Resident Individual
8
New York State Bar Association. Report on New York State Tax Law Section 612(b)(41)
9
New York State Department of Taxation and Finance. Apply for an Extension of Time to File an Income Tax Return
10
New York State Department of Taxation and Finance. Instructions for Form IT-2106 Estimated Income Tax Payment
11
New York State Senate. New York Code TAX 685 – Additions to Tax and Civil Penalties
12
New York State Department of Taxation and Finance. Interest and Penalties