Any income generated by a revocable trust is taxable to the trust's creator (who is often also referred to as a settlor, trustor, or grantor) during the trust creator's lifetime. This is because the trust's creator retains full control over the terms of the trust and the assets contained within it.
A trust's taxable income includes interest income, dividends, and capital gains, and it subtracts any fees, tax exemptions, and capital losses. For the DNI calculation, capital gains are subtracted back out, while tax exemptions and capital losses are added back in.
This concept of income is used as the measure of the amount that must be distributed from a trust in order for the trust to qualify for certain treatment under various provisions of the Internal Revenue Code.
Distributed net income (DNI)
DNI is the portion of a trust's income distributed to the beneficiaries and is taxable at their personal tax rates. Distributions can include cash payments, property transfers, or any other form of income that the trust passes to its beneficiaries.
Trust accounting income includes all income generated by the trust, including interest, dividends, and capital gains. Taxable income includes all income subject to taxation, but certain types of income may be excluded or have special rules for taxation purposes.
To calculate net income, take the gross income — the total amount of money earned — then subtract expenses, such as taxes and interest payments. For individuals, net income is the money you actually receive from your paycheck each month rather than the gross amount you get paid before payroll deductions.
the income of a trust only, for example from renting out a house held in a trust. the capital only, for example getting shares held in a trust when they reach a certain age. both the income and capital of the trust.
Fixed income refers to assets and securities that pay a set level of income to investors, typically in the form of fixed interest or dividends. Government and corporate bonds are the most common types of fixed-income products. Fixed-income securities are considered to have lower returns and lower risk than stocks.
Use Form 541 if any of the following apply to report: Income received by an estate or trust. Income that is accumulated or currently distributed to the beneficiaries. An applicable tax liability of the estate or trust.
(1) (a) For the purposes of this section, "undistributed income" means net income received before the date on which an income interest ends. (b) The term does not include an item of income or expense that is due or accrued or net income that has been added or is required to be added to principal by the trust.
Trust beneficiaries must pay taxes on income and other distributions from a trust. Trust beneficiaries don't have to pay taxes on principal from the trust's assets. IRS forms K-1 and 1041 are required for filing tax returns that receive trust disbursements.
When someone dies, their assets become property of their estate. Any income the assets generate become part of the estate and may require you to file an estate income tax return.
Instead of trusts paying any tax owed on the trust's income, the trust's beneficiaries usually pay this tax on any distributions they receive. That said, the beneficiaries do not pay taxes on any distributions received from a trust's principal, which is the initial amount of money transferred to the trust.
Another key difference: While there is no federal inheritance tax, there is a federal estate tax. The federal estate tax generally applies to assets over $13.61 million in 2024 and $13.99 million in 2025, and the federal estate tax rate ranges from 18% to 40%.
Generally speaking, distributions from trusts are considered income and, therefore, may be subject to taxation depending on the type of trust and its purpose.
Calculating trust accounting income
The trustee must divide these amounts between “income” and “principal” which often benefit different beneficiaries. Typically, a distribution from an estate or a new gift constitutes principal, while interest and dividends constitute income.
Examples of fixed-income securities include bonds, treasury bills, Guaranteed Investment Certificates (GICs), mortgages or preferred shares, all of which represent a loan by the investor to the issuer.
Thus, when calculating DNI, the fiduciary starts with taxable income and then makes adjustments. It is trust accounting income, less any deductible expenses, whether allocated to either income or principal. Summary: DNI is taxable income, less capital gains, plus tax-exempt income.
If you are the beneficiary of a trust, you are typically responsible for paying tax on your share of the trust income that's allocated to you by the trust. The Schedule K-1 you receive provides details about your share of the trust's income, deductions and credits, which you report on your tax return.
For a gift in trust, each beneficiary of the trust is treated as a separate donee for purposes of the annual exclusion. All of the gifts made during the calendar year to a donee are fully excluded under the annual exclusion if they are all gifts of present interest and they total $18,000 or less.
Generally, you must include in gross income everything you receive in payment for personal services. In addition to wages, salaries, commissions, fees, and tips, this includes other forms of compensation such as fringe benefits and stock options.
Gross income is the total amount earned. Net income is gross income minus expenses, interest, and taxes.
To calculate an annual salary, multiply the gross pay (before tax deductions) by the number of pay periods per year. For example, if an employee earns $1,500 per week, the individual's annual income would be 1,500 x 52 = $78,000.