What Is Distributable Net Income (DNI)?

Distributable net income, or DNI, is the amount paid from a trust to its beneficiaries. DNI also refers to the maximum taxable amount rec𒉰eived by a unitholder or beneficiary of a trust.

This figure is capped to prevent do♉uble taxation. Any amount above the DNI that is𝓀 distributed is, therefore, tax-free.

Understanding Distributable Net Income (DNI)

The Internal Revenue Service (IRS) considers distributable net income to be an estimate of the economic value that stems from a distribution to a beneficiary. A distribution is a payment made from an estate or an income trus♚t to a beneficiary.

DNI is intended to provide trust beneficiaries with a reliable income source while minimizing the amount of income taཧxes paid by the trust.

Estates and non-grantor trusts, like individuals, must file income tax returns. Non-grantor trusts are funded by the grantor—the person or entity that creates the trust. But this kind of trust functions entirely on its own, as the grantor gives up contr🍬ol of the assets to the trust.

The income these trusts report is taxed at either the entity or beneficiary level. Which level is taxed depends on whether it is allocated to the principal amount or to the distributable income, and whether the༺ amount is distributed to the beneficiaries. 

According to U.S. tax code, estates and trusts are allowed to deduct the sum of the trust income required to be distributed and other amounts “properly paid or credited or required to be distributed” or the distributable net income, whichever is less, to beneficiaries to prevent 澳洲幸运5官方开奖结果体彩网:double taxation on income.

An income trust recognizes distributable net income as an amount transferred to unitholders. With ♌an estate trust, it’s the amount to be distributed to a beneficiary.

Special Considerations

As noted above, when a trust calculates the distributable net income, it essentially prevents any instance of 澳洲幸运5官方开奖结果体彩网:double taxation of the funds issued by a t♉rust. The formula to calculate the figure is as follows:

• Distributable Net Income (DNI) = Taxable Income - Capital Gains + Tax Exemption

In instances where there are 澳洲幸运5官方开奖结果体彩网:capital losses,♛ ✨that figure replaces the capital gains and is added to the formula instead of subtracted.

To calculate the taxable income, you need to add the interest income, 澳洲幸运5官方开奖结果体彩网:dividends, and capital gains, then subtract any🍃 fees and tax eജxemptions.

Unlike for the DNI calculation, capital gains are added in the tax🌃able income formula while capital losses are subtracted.

Distributable Net Income (DNI) vs. Net Income

Distributable net income is not the same as 澳洲幸运5官方开奖结果体彩网:net income. DNI is the income distributed from a trust to its beneficiary or beneficiaries. Net income is used by a public company to calculate its 澳洲幸运5官方开奖结果体彩网:earnings per share (EPS), which is the total profit of a company divided by the number of outstanding shares of its🍸 common stock. (Net income is also referred to as net earnings.)

Net income appears on a company's balance sheet and helps indicate how profitable the company is. To calculate its net income, companies subtract any general and administrative expenses, operating expenses, interest, taxes, other expenses, and the 澳洲幸运5官方开奖结果体彩网:cost of goods sold (COGS) from the total amount of sales.

In a wider context, the term net income can refer to an individual's 澳洲幸运5官方开奖结果体彩网:take-home pay. This is the amount of m🐭oney a person earns after any deductꦗions are taken from their paychecks such as taxes, healthcare, and insurance.

A person's net income can be contrasted with their 澳洲幸运5官方开奖结果体彩网:gross income—the amount they earn before any deductions.

Example of Distributable Net Income (DNI)

Here's an example of how DNI is calculated using a fictional trust we'll call ABC Trust. Let's say ABC Trust reported total income of $40,000. Interest income was $10,000 of this, while the remaining $30,000 was derived from dividends. Fees charged by the trust amounted to $3,000, and the trust realized a 澳洲幸运5官方开奖结果体彩网:capital gain of $15,000. An 澳洲幸运5官方开奖结果体彩网:exemption of $300 applied to the trust.

If we use the formula above, the trust's taxable income is $51,700:

• $51,700 = $10,000 (interest income) + $30,000 (dividends) + $15,000 (capital gain) - $3,000 (fees) - $300 (exemption)

We can then use this taxable income figure to꧙ cal༺culate the DNI, which would be $37,000:

• $37,000 = $51,700 (taxable income) - $15,000 (capital gain) + $300 (exemption)

The Bottom Line

Distributable net income is the maximum taxable amount that can b🌳e distributed to the beneficiaries of a trust. The formula used to calculate DNI takes the taxable income, subtrac൩ts capital gains, and adds an exemption.