The ABC Trust incurs the following items: Taxable interest income $100,000 Taxab
ID: 2484315 • Letter: T
Question
The ABC Trust incurs the following items:
Taxable interest income
$100,000
Taxable dividend income
80,000
Long-term capital gains (allocable to corpus)
20,000
Trustee fees
10,000
The trust has one beneficiary, Kate, who is guaranteed an annual $175,000 payment from the trust. In addition, the trustee can distribute, at her discretion, any additional amounts of corpus and accumulated income as the beneficiary requires. No such additional payments were made this year. Both the trust and Sam are calendar year, cash-basis, taxpayers.
a.Compute the trust's accounting income.
b.Compute taxable income before distribution deduction.
c.Compute DNI.
d.What is the allowed distribution deduction?
e.Compute the trust’s taxable income and tax liability.
f.What is the character and amount of the income Kate must report on her individual
return?
Taxable interest income
$100,000
Taxable dividend income
80,000
Long-term capital gains (allocable to corpus)
20,000
Trustee fees
10,000
Explanation / Answer
Since, there are multiple parts to the question, the first four have been answered.
___________
Part 1)
The trust's accounting income will be calculated as follows:
Trust's Accounting Income = Interest Income + Dividend Income
Using the values provided in the question, we get,
Trust's Accounting Income = 100,000 + 80,000 = $180,000
_______
Part B)
The trust's taxable income before distribution deduction will be calculated as follows:
Trust's Taxable Income = Interest Income + Dividend Income + Capital Gain - Trustee Fees - Personal Exemption Amount
Using the values provided in the question, we get,
Trust's Taxable Income = 100,000 + 80,000 + 20,000 - 10,000 - 100 = $189,900
_______
Part C)
The value of DNI calculated with the use of following formula:
DNI = Taxable Income - Long Term Capital Gain + Personal Exemption Amount
Using the taxable income calculated above, we get,
DNI = 189,900 - 20,000 + 100 = $170,000
_______
Part D)
The maximum distribution deduction will be equal to the value of DNI. It cannot be more than DNI. Therefore, the value of distribution deduction would be $170,000 only.
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