What Is Distributable Net Income (DNI)?

What Is Distributable Net Income (DNI)?

Let me explain distributable net income, or DNI, directly to you: it's the amount paid from a trust to its beneficiaries. DNI also sets the maximum taxable amount that a unitholder or beneficiary receives from a trust.

This figure is capped specifically to avoid double taxation. If any distribution exceeds the DNI, that excess is tax-free for the recipient.

Key Takeaways on DNI

You should know that distributable net income, or DNI, is the money distributed to trust beneficiaries. It represents the maximum taxable amount they receive, with anything above that being tax-free.

The purpose of a trust's DNI is to ensure beneficiaries get a steady income stream while keeping the trust's income taxes as low as possible. To calculate DNI, start with the trust's taxable income, subtract capital gains or add capital losses, and then add the exemption.

Understanding Distributable Net Income (DNI)

The IRS views distributable net income as an estimate of the economic value from a distribution to a beneficiary. A distribution is simply a payment from an estate or income trust to that beneficiary.

DNI exists to give trust beneficiaries a dependable income source and to reduce the income taxes the trust pays. Estates and non-grantor trusts, much like individuals, must file income tax returns. Non-grantor trusts are set up by a grantor who funds them but relinquishes control over the assets.

The income from these trusts gets taxed either at the trust level or the beneficiary level, depending on whether it's allocated to the principal or distributable income, and if it's actually distributed. Per U.S. tax code, estates and trusts can deduct the lesser of the required distributed trust income or the distributable net income to avoid double taxation on that income.

In an income trust, DNI is the amount transferred to unitholders. For an estate trust, it's the amount distributed to a beneficiary.

A Quick Tip on Deductions

Remember, estates and trusts can deduct the distributable net income or the sum of the trust income required to be distributed—whichever is smaller.

Special Considerations for DNI

When a trust figures out its distributable net income, it prevents double taxation on the funds distributed. The formula is straightforward: Distributable Net Income (DNI) = Taxable Income - Capital Gains + Tax Exemption.

If there are capital losses instead, you add those back in rather than subtracting gains. Note that while personal exemptions were repealed for individuals through 2025, trusts and estates still get them: trusts can claim $100 or $300, and estates get $600.

To get taxable income, add interest income, dividends, and capital gains, then subtract fees and tax exemptions. For taxable income, you add capital gains and subtract capital losses—unlike the DNI calculation where gains are subtracted out.

Distributable Net Income (DNI) vs. Net Income

Don't confuse distributable net income with net income. DNI is specifically the income distributed from a trust to beneficiaries. Net income, on the other hand, is what a public company uses to calculate earnings per share (EPS), which is total profit divided by outstanding common stock shares—also called net earnings.

Net income shows up on a company's balance sheet and indicates profitability. Companies calculate it by subtracting general and administrative expenses, operating expenses, interest, taxes, other expenses, and cost of goods sold from total sales.

In a broader sense, net income can mean an individual's take-home pay after deductions like taxes, healthcare, and insurance. This contrasts with gross income, which is earnings before any deductions.

Example of Distributable Net Income (DNI)

Let me walk you through an example using a fictional ABC Trust. Suppose ABC Trust has total income of $40,000, with $10,000 from interest and $30,000 from dividends. Fees are $3,000, there's a $15,000 capital gain, and a $300 exemption applies.

First, taxable income is $51,700: that's $10,000 interest + $30,000 dividends + $15,000 capital gain - $3,000 fees - $300 exemption.

Then, DNI comes to $37,000: $51,700 taxable income - $15,000 capital gain + $300 exemption.

What Is the Difference Between Taxable Income and Distributable Net Income?

A trust's taxable income includes interest, dividends, and capital gains, minus fees, exemptions, and capital losses. For DNI, you subtract capital gains back out and add exemptions and capital losses back in.

Does Distributable Net Income Include Capital Gains?

No, distributable net income excludes capital gains and losses; they're removed from the taxable income for DNI purposes.

What Are the 2024 Trust and Estate Exemption Amounts?

For 2024, estates get a $600 exemption, trusts required to distribute all income get $300, qualified disability trusts get $5,000, and other trusts get $100.

The Bottom Line

Distributable net income is the maximum taxable amount distributable to trust beneficiaries. You calculate it by taking taxable income, subtracting capital gains, and adding the exemption.