E.39 Income taxation of trusts and estates

Question 1

Which of the following is true regarding the taxation of trusts?

A. Trusts are not taxed on their income.
B. Trusts are taxed at a flat rate of 10% on all income.
C. Trusts are taxed on their income at the same rates as individuals.
D. Trusts are taxed on their income at a lower rate than individuals.

Answer 1

C. Trusts are taxed on their income at the same rates as individuals.

E.39 Income taxation of trusts and estates

Question 2

Which of the following is true regarding the distribution of income from a trust to a beneficiary?

A. The beneficiary is not taxed on the distribution of income.
B. The beneficiary is taxed on the distribution of income at a lower rate than the trust.
C. The beneficiary is taxed on the distribution of income at the same rate as the trust.
D. The beneficiary is taxed on the distribution of income at a higher rate than the trust.

Answer 2

C. The beneficiary is taxed on the distribution of income at the same rate as the trust.

E.39 Income taxation of trusts and estates

Question 3

Which of the following is true regarding the deductibility of expenses for a trust?

A. Trusts are not allowed to deduct any expenses.
B. Trusts can deduct expenses related to the administration of the trust.
C. Trusts can deduct expenses related to the distribution of income to beneficiaries.
D. Trusts can deduct any expenses that an individual can deduct.

Answer 3

B. Trusts can deduct expenses related to the administration of the trust.

E.39 Income taxation of trusts and estates

Question 4

Which of the following is true regarding the tax treatment of capital gains for a trust?

A. Trusts are not subject to tax on capital gains.
B. Trusts are taxed at a lower rate than individuals on capital gains.
C. Trusts are taxed on capital gains at the same rates as individuals.
D. Trusts are taxed at a higher rate than individuals on capital gains.

Answer 4

C. Trusts are taxed on capital gains at the same rates as individuals.

E.39 Income taxation of trusts and estates

Question 5

Which of the following is true regarding the tax treatment of charitable contributions made by a trust?

A. Charitable contributions made by a trust are not deductible.
B. Charitable contributions made by a trust are only deductible if they are made to a private foundation.
C. Charitable contributions made by a trust are deductible if they are made to a qualified charitable organization.
D. Charitable contributions made by a trust are deductible only if they exceed 10% of the trust’s income.

Answer 5

C. Charitable contributions made by a trust are deductible if they are made to a qualified charitable organization.

E.39 Income taxation of trusts and estates

Question 6

Which of the following is true regarding the tax treatment of distributions from an estate to beneficiaries?

A. Distributions from an estate to beneficiaries are tax-free.
B. Distributions from an estate to beneficiaries are subject to tax at the estate level.
C. Distributions from an estate to beneficiaries are taxed at the same rates as the beneficiaries’ individual income tax rates.
D. Distributions from an estate to beneficiaries are taxed at a lower rate than the beneficiaries’ individual income tax rates.

Answer 6

C. Distributions from an estate to beneficiaries are taxed at the same rates as the beneficiaries’ individual income tax rates.

E.39 Income taxation of trusts and estates

Question 7

Which of the following is true regarding the tax treatment of expenses paid by an estate?

A. Expenses paid by an estate are not deductible.
B. Expenses paid by an estate are deductible only if they are related to the administration of the estate.
C. Expenses paid by an estate are deductible if they are ordinary and necessary for the production of income.
D. Expenses paid by an estate are deductible if they are related to the distribution of income to beneficiaries.

Answer 7

B. Expenses paid by an estate are deductible only if they are related to the administration of the estate.

E.39 Income taxation of trusts and estates

Question 8

Which of the following is true regarding the tax treatment of net operating losses (NOLs) for a trust or estate?

A. Trusts and estates are not allowed to carry back NOLs.
B. Trusts and estates are allowed to carry forward NOLs for up to 20 years.
C. Trusts and estates are allowed to carry back NOLs for up to 2 years.
D. Trusts and estates are allowed to carry forward NOLs indefinitely.

Answer 8

C. Trusts and estates are allowed to carry back NOLs for up to 2 years.

E.39 Income taxation of trusts and estates

Question 9

Which of the following is true regarding the tax treatment of trust income distributed to a charity?

A. Trust income distributed to a charity is not taxable.
B. Trust income distributed to a charity is taxable to the trust, but the trust is allowed to deduct the contribution.
C. Trust income distributed to a charity is taxable to the trust, and the trust is not allowed to deduct the contribution.
D. Trust income distributed to a charity is taxable to the charity.

Answer 9

B. Trust income distributed to a charity is taxable to the trust, but the trust is allowed to deduct the contribution.

E.39 Income taxation of trusts and estates

Question 10

Which of the following is true regarding the tax treatment of distributions from a simple trust?

A. Distributions from a simple trust are always tax-free to the beneficiary.
B. Distributions from a simple trust are always taxable to the beneficiary.
C. Distributions from a simple trust are tax-free to the beneficiary to the extent of the trust’s distributable net income (DNI).
D. Distributions from a simple trust are tax-free to the beneficiary to the extent of the trust’s gross income.

Answer 10

C. Distributions from a simple trust are tax-free to the beneficiary to the extent of the trust’s distributable net income (DNI).

E.39 Income taxation of trusts and estates

Question 11

The estate of Mr. Smith had the following items for the tax year:
Income from interest and dividends: $25,000
Long-term capital gain: $10,000
Short-term capital loss: ($3,000)
Charitable contribution deduction: ($2,000)

What is the estate’s taxable income for the year?

A. $28,000
B. $30,000
C. $31,000
D. $33,000

Answer 11

C. $31,000

The estate’s taxable income is calculated as follows:

Income from interest and dividends: $25,000
Long-term capital gain: $10,000
Short-term capital loss: ($3,000)
= Gross income: $32,000
Charitable contribution deduction: ($2,000)
= Taxable income: $31,000

E.39 Income taxation of trusts and estates

Question 12

The Smith Family Trust had the following items for the tax year:
Income from interest and dividends: $50,000
Deductible trustee fees: ($2,000)
State income tax paid: ($1,000)

What is the trust’s taxable income for the year?

A. $47,000
B. $49,000
C. $50,000
D. $51,000

Answer 12

B. $49,000

The trust’s taxable income is calculated as follows:

Income from interest and dividends: $50,000
Deductible trustee fees: ($2,000)
= Gross income: $48,000
State income tax paid: ($1,000)
= Taxable income: $49,000

E.39 Income taxation of trusts and estates

Question 13

The Johnson Family Trust had the following items for the tax year:
Income from interest and dividends: $40,000
Deductible trustee fees: ($2,500)
State income tax paid: ($1,500)
Charitable contribution deduction: ($3,000)

What is the trust’s distributable net income (DNI) for the year?

A. $33,000
B. $36,000
C. $38,000
D. $39,000

Answer 13

A. $33,000

The trust’s DNI is calculated as follows:

Income from interest and dividends: $40,000
Deductible trustee fees: ($2,500)
= Trust accounting income: $37,500
State income tax paid: ($1,500)
= Taxable income: $36,000
Charitable contribution deduction: ($3,000)
= DNI: $33,000

E.39 Income taxation of trusts and estates

Question 14

The Brown Family Trust had the following items for the tax year:
Income from interest and dividends: $20,000
Deductible trustee fees: ($1,500)
State income tax paid: ($1,000)
Long-term capital loss: ($2,000)

What is the trust’s taxable income for the year?

A. $15,500
B. $16,500
C. $17,500
D. $18,500

Answer 14

A. $15,500

The trust’s taxable income is calculated as follows:

Income from interest and dividends: $20,000

Deductible trustee fees: ($1,500)
= Gross income: $18,500
State income tax paid: ($1,000)
Long-term capital loss: ($2,000)
= Taxable income: $15,500

E.39 Income taxation of trusts and estates

Question 15

The Green Family Trust had the following items for the tax year:
Income from interest and dividends: $30,000
Deductible trustee fees: ($2,000)
State income tax paid: ($1,500)
Charitable contribution deduction: ($4,000)

What is the trust’s taxable income for the year?

A. $22,500
B. $24,500
C. $25,500
D. $26,500

Answer 15

A. $22,500

E.39 Income taxation of trusts and estates

Question 16

The Davis Family Trust had the following items for the tax year:
Income from interest and dividends: $60,000
Deductible trustee fees: ($3,000)
State income tax paid: ($2,500)
Charitable contribution deduction: ($7,000)

What is the trust’s distributable net income (DNI) for the year?

A. $47,500
B. $50,000
C. $52,500
D. $54,000

Answer 16

C. $52,500

To calculate the distributable net income (DNI) for a trust, you start with the trust’s accounting income and make certain adjustments. Here are the steps to calculate the DNI for the Davis Family Trust based on the provided information:

1. Start with the trust’s accounting income: $60,000.
2. Deduct any expenses that are not allowable deductions for DNI:
   
   • Deductible trustee fees: ($3,000)
3. Add back any items that are not included in DNI but were deducted from accounting income:
   
   • State income tax paid: ($2,500)
4. Subtract any items that are included in DNI but were not deducted from accounting income:
   
   • Charitable contribution deduction: ($7,000)

Now, let’s calculate the DNI:

$60,000 (Accounting Income)
- $3,000 (Deductible trustee fees)
+ $2,500 (State income tax paid)
- $7,000 (Charitable contribution deduction)

DNI = $60,000 - $3,000 + $2,500 - $7,000
DNI = $52,500

So, the Davis Family Trust’s distributable net income (DNI) for the year is $52,500.

E.39 Income taxation of trusts and estates

Question 17

The White Family Trust had the following items for the tax year:
Income from interest and dividends: $45,000
Deductible trustee fees: ($2,500)
State income tax paid: ($2,000)
Short-term capital gain: $1,000

What is the trust’s taxable income for the year?

A. $41,500
B. $42,500
C. $43,500
D. $44,500

Answer 17

C. $43,500

The trust’s taxable income is calculated as follows:

Income from interest and dividends: $45,000
Deductible trustee fees: ($2,500)
= Gross income: $42,500
State income tax paid: ($2,000)
Short-term capital gain: $1,000
= Taxable income: $43,500

E.39 Income taxation of trusts and estates

Question 18

The Black Family Trust had the following items for the tax year:
Income from interest and dividends: $80,000
Deductible trustee fees: ($4,000)
State income tax paid: ($3,500)
Charitable contribution deduction: ($10,000)

What is the trust’s taxable income for the year?

A. $60,500
B. $62,500
C. $64,500
D. $66,500

Answer 18

B. $62,500

The trust’s taxable income is calculated as follows:

Income from interest and dividends: $80,000

Deductible trustee fees: ($4,000)
= Gross income: $76,000
State income tax paid: ($3,500)
= Taxable income before charitable contribution: $72,500
Charitable contribution deduction: ($10,000)
= Taxable income: $62,500

E.39 Income taxation of trusts and estates

Question 19

The Orange Family Trust had the following items for the tax year:
Income from interest and dividends: $25,000
Deductible trustee fees: ($1,500)
State income tax paid: ($1,000)
Long-term capital gain: $5,000
Charitable contribution deduction: ($3,000)

What is the trust’s distributable net income (DNI) for the year?

A. $23,500
B. $24,500
C. $25,500
D. $26,500

Answer 19

C. $24,500

The trust’s DNI is calculated as follows:

Income from interest and dividends: $25,000
Deductible trustee fees: ($1,500)
= Trust accounting income: $23,500
State income tax paid: ($1,000)
Long-term capital gain: $5,000
= Taxable income before charitable contribution: $27,500
Charitable contribution deduction: ($3,000)
= DNI: $24,500

E.39 Income taxation of trusts and estates

Question 20

The Brown Family Trust had the following items for the tax year:
Income from interest and dividends: $40,000
Deductible trustee fees: ($2,500)
State income tax paid: ($2,000)
Short-term capital loss: ($500)

What is the trust’s taxable income for the year?

A. $36,000
B. $37,000
C. $38,000
D. $39,000

Answer 20

A. $36,000

The trust’s taxable income is calculated as follows:

Income from interest and dividends: $40,000
Deductible trustee fees: ($2,500)
= Gross income: $37,500
State income tax paid: ($2,000)
Short-term capital loss: ($500)
= Taxable income: $36,000

E.39 Income taxation of trusts and estates

Question 21

David and Maria established a charitable remainder unitrust (CRUT) with $150,000 of stock that has a cost basis of $15,000. Their adjusted gross income (AGI) this year is $120,000. What would be the minimum charitable income tax deduction available to David and Maria in the year the trust was established?

A. $10,000
B. $15,000
C. $120,000
D) $150,000

Answer 21

B. $15,000

The charitable income tax deduction is determined by the lesser of the fair market value of the assets donated or the cost basis of those assets. In David and Maria’s case, they donated stock with a fair market value of $150,000, but it had a cost basis of $15,000. Therefore, the minimum charitable income tax deduction available to them would be $15,000, which is the cost basis of the stock.

E.39 Income taxation of trusts and estates