Distributable Net Income (DNI)

Distributable Net Income (DNI) is the tax concept that determines the maximum amount of a trust’s or estate’s income that can be passed through to beneficiaries and taxed at the beneficiary level. It prevents double taxation by identifying what portion of an estate or trust’s income is taxable to recipients rather than to the entity.

Key points

• DNI is the maximum taxable income beneficiaries may report from distributions.
• The IRS uses DNI to allocate tax liability between trusts/estates and beneficiaries.
• Capital gains are generally excluded from DNI to avoid double taxation.
• Estates and trusts may deduct the lesser of required distributions or DNI when computing taxable income.

Formula and how it works

Basic formula:
DNI = Taxable Income − Capital Gains + Tax Exemption

Notes:
* If a trust has capital losses instead of gains, the loss replaces the capital gains term and is added in the DNI calculation.
* Taxable income for the trust typically includes interest, dividends, and capital gains, minus fees and applicable exemptions.
* Capital gains are included in taxable income but then removed (subtracted) when computing DNI.

Because DNI determines what beneficiaries must report, the trust or estate can deduct distributed income (up to DNI) to avoid being taxed on the same income.

Example (ABC Trust)

Assume:
* Interest income: $10,000
Dividends: $30,000
Capital gain: $15,000
Fees: $3,000
Trust exemption: $300

Step 1 — Compute taxable income:
Taxable income = 10,000 + 30,000 + 15,000 − 3,000 − 300 = $51,700

Step 2 — Compute DNI:
DNI = 51,700 − 15,000 + 300 = $37,000

The $37,000 is the maximum amount the trust can distribute that will be taxable to beneficiaries (subject to actual distributions and other rules).

DNI vs. Other income measures

• DNI vs. Taxable Income: Taxable income of the trust includes capital gains; DNI removes capital gains and adjusts for exemptions and losses. DNI focuses on distributable, beneficiary-taxable income.
• DNI vs. Net Income (business/individual): Net income (profit) is a general accounting measure of earnings after expenses. DNI is a tax construct specific to trusts and estates that allocates taxable income to beneficiaries.

Common questions

Q: Does DNI include capital gains?
A: Generally no. Capital gains are excluded from DNI to prevent the same gain from being taxed to both the trust/estate and the beneficiary.

Q: How does DNI prevent double taxation?
A: The trust or estate deducts distributed amounts up to DNI; beneficiaries report those distributions as income. This allocation avoids taxing the same income at both entity and beneficiary levels.

Q: Who files returns and pays tax?
A: Estates and non-grantor trusts file their own tax returns. Whether income is taxed at the entity or beneficiary level depends on how much is distributed and whether it falls within DNI.

Trust and estate exemptions (example amounts)

Exemption amounts vary by type of trust or estate and tax year. For example, typical exemptions have included amounts such as:
* Estate exemption (example): $600
Trust required to distribute all income: $300
Qualified disability trust: $5,000
* Other trusts: $100

(Confirm current exemption amounts for the relevant tax year when preparing returns.)

Practical takeaways

• Compute DNI to determine the tax consequences of distributions to beneficiaries.
• Exclude capital gains from DNI; add or subtract capital losses as appropriate.
• Trusts and estates may deduct distributed income up to DNI to avoid double taxation.
• Always verify current exemption amounts and tax rules for the applicable tax year.