Final answer:
The Taylor Trust's distributable net income (DNI) for Year 5 is calculated by totaling its income, excluding tax-exempt income, and then subtracting allowable expenses. The DNI for Year 5 is $6,500.
Step-by-step explanation:
The distributable net income (DNI) of the Taylor Trust for Year 5 is calculated by starting with the trust's gross income and then deducting the allowable expenses. To begin with, we total all of the income items:
- Rental income: $5,000
- Long-term capital gains: $2,500
- Corporate bond interest: $1,000
- Interest from savings account: $200
- Municipal bond interest (which is generally tax-exempt and thus not included in DNI calculation): $2,000
Now, we will subtract the expenses that are applicable:
- Rent expense: $2,000
- Investment expense relating to tax-exempt income (not deductible): $300
- Trustee fee: $500, but since it is allocated 60% to principal and 40% to income, we include only the income portion which is $500 x 40% = $200
Thus, the calculation of DNI would be:
Gross Income (excluding tax-exempt income): $5,000 + $2,500 + $1,000 + $200 = $8,700
Total Deductible Expenses: $2,000 (rent expense) + $200 (part of trustee fee allocated to income) = $2,200
Distributable Net Income: $8,700 (Gross Income) - $2,200 (Total Deductible Expenses) = $6,500