DNI Materials

Trust Accting Income IRS Taxable Income

Assume:

Dividend Income: $25,000 $25,000 $25,000

Taxable Int: $15,000 $15,000 $15,000

Tax Exempt Int. $20,000 $20,000 0

Capital Gain $10,000 0 $10,000

Fiduciary Fee: $ 6,000 ($4,000)

(allocate $2000 to Exempt Interest) ($300)

Exemption

________ _______

$60,000 $45,700

Other relevant items:

a) Trust document says capital gains are corpus. All expenses allocable to corpus.

b) $60,000 is distributed to Beneficiaries of Trust Income

c) This is a simple trust.

Thus, DNI is calculated as follows:

IRS Taxable Income $45,700

Exemption $ 300

Less: capital gain to corpus -$10,000

Net exempt interest

$20,000- 2000 fid fee) 18,000

DNI $54,000

Distribution Deduction is the lesser of the

(a) distributed amount $60,000

OR

(b) Deductible portion of DNI

($54,000 - $18.000*) $36,000

Thus, here it would be $36,000

* Notice this is the net tax exempt interest, thus it is not deductible.

Thus, entity taxable income would be:

$45,700 (taxable income) LESS $36,000 distribution deduction, or $9,700.

Confused?
Don’t be!

Think about it: this is the capital gain ($10,000) less the $300 exemption

Another example:

QTrust distributes all of its current accounting income equally to two beneficiaries: Faith, a person, and Universal church, a charitable institution. Capital gains/losses and depreciation are allocable to income. Fiduciary fees are allocable to corpus.

Assume:

Accounting Income Taxable Income (IRS)

Rent Income $100,000 $100,000 $100,000

Expenses, Rent income $30,000 (30,000) ($30,000)

Deprec. Rent income $15,000 $15,000 *allocated to beneficiaries on K-1

Net LT Capital Gain $20,000 $20,000 $20,000

Charitable contribution ($37,500) (1/2 of trust accounting income)

Fid. Fees $18,000 ($18,000)

Personal Exemption (300)

_________ ________

$75,000 $34,200

DNI calculation:

Taxable Income $34,200

Add: Exemption 300

DNI $34,500

Distribution Deduction is lesser of (a) distributed amount ($75,000) or (b) deductible portion of DNI ($34,500)

Thus, entity taxable income is:

$34,200 LESS $34,500, or ($300).