Charitable remainder trust taxation refers to the way CRT distributions and deductions are treated under federal tax law. Donors receive an upfront charitable income-tax deduction based on the present value of the remainder interest going to charity, calculated using IRS discount rates and actuarial factors. The trust itself is generally tax-exempt, but beneficiaries are taxed on distributions under a four-tier system that classifies amounts as ordinary income, capital gains, tax-exempt income, or return of principal in that order. When appreciated property is sold inside a CRT, the resulting gain is recognized over time as distributions are made, rather than all at once.

Advisors and CPAs analyze charitable remainder trust taxation when modeling whether a CRT is appropriate for a clientTMs goals. They estimate the immediate deduction, compare after-tax income from CRT distributions versus direct sale and reinvestment, and consider how long beneficiaries are likely to receive payments. Clear explanations of the four-tier distribution rules help clients understand that CRT payments may include a mix of ordinary income and capital gains over time. Understanding CRT taxation is critical for setting realistic expectations and ensuring clients appreciate both the benefits and complexities of charitable remainder structures.