Distributable Net Income is divided into different classes of income:
- Interest
- Dividends
- Other Income
- Passive Real Estate
- Passive Other
- Short Term Capital Gain
- Long Term Capital Gain
- Non Taxable (Tax Exempt Income)
These classes parallel the divisions of income on the K-1
When allocating the deductions against these classes of income there are two automatic choices: Tier Allocation or Pro-Rata Allocation. This option is set in User Options or within the client in Screen 44.
- Pro-Rata Allocation allocates the deductions to the classes of income based on the relative dollar amounts of the classes of income. Thus every class will have some level of deduction allocated to it.
- Tier Allocation allocates the deductions in a descending tier order. That is, it applies the deductions against the first class of income and then the second class and so on until the deductions are all used up. This preserves the Passive Income which many preparers and trust instruments prefer.
- To determine which allocation should be used, first consult the trust instrument. Many trust instruments will specify the allocation method, then if there is no specification, the preparer will choose the method.
- Overrides are available when neither of the two methods above apply. Both Charitable Contribution and Regular Deduction Overrides are available for use. The overrides are designed to do partial residual allocation, so that if you specify that overall you are allocating based on pro-rata, but you want a certain dollar amount to go to one particular category, then the residual will be allocated using pro-rata to the remaining categories.
- The Corpus Distributed Column is for the use of Split-Interest Trusts ONLY. It will only be filled out when the calculated Annuity/Unitrust Amount is greater than the current income. This amount will tie to Form 5227, Part III.
- Short Term Capital Loss Carryover - This column will only be filled out for a final year return that has a short term capital loss carryover.
- Long Term Capital Loss Carryover - This column will only be filled out for a final year return that has a long term capital loss carryover.
- Excess Deductions - This column will be filled out only in the final year of a return that has excess deductions on termination.
