ExpertHard1 markMultiple Choice
CPA · Question 42 · Area II: Entity Tax Compliance
A Complex Trust has DNI of $15,000. It distributes $20,000 to the sole beneficiary. $5,000 of the DNI is tax-exempt interest. What is the amount of the Income Distribution Deduction allowed to the trust?
A Complex Trust has DNI of $15,000. It distributes $20,000 to the sole beneficiary. $5,000 of the DNI is tax-exempt interest. What is the amount of the Income Distribution Deduction allowed to the trust?
Answer options:
A.
$20,000
B.
$15,000
C.
$10,000
D.
$5,000
How to approach this question
Income Distribution Deduction = Lesser of (Total Distribution) or (DNI), reduced by tax-exempt income included in those amounts.
Full Answer
C.$10,000✓ Correct
IRC §651(b), §661(c). The deduction is limited to the taxable portion of DNI. <br/>Taxable DNI = Total DNI ($15,000) - Tax Exempt ($5,000) = $10,000. <br/>The deduction is $10,000.
Common mistakes
Deducting the full DNI including tax-exempt interest.
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