Final answer:
Distributable Net Income (DNI) is the taxable income of a trust or estate after deducting certain expenses and allocating income among beneficiaries. It represents the amount of income available for distribution.
Step-by-step explanation:
Distributable Net Income (DNI) is a term typically used in the field of taxation to refer to the income that a trust or estate can distribute to beneficiaries. Essentially, DNI is the taxable income of the trust or estate after deducting certain expenses and allocating income among beneficiaries. It represents the amount of income that is available to be distributed, and it is subject to taxation at the individual level.
To calculate DNI, you start with the trust or estate's taxable income and make certain adjustments. These adjustments include adding back tax-exempt income, subtracting capital gains and losses, and allocating certain expenses and deductions to beneficiaries. The resulting amount is the DNI, which is then used to determine the tax liability of the trust or estate and the beneficiaries.
For example, let's say a trust has taxable income of $100,000. After making the necessary adjustments, such as adding back $10,000 of tax-exempt income and subtracting $5,000 of capital losses, the DNI is calculated to be $105,000. This means that the trust has $105,000 available to distribute to the beneficiaries, and this amount will be subject to taxation at the individual level.