Distributable Net Income (DNI): Definition, Formula, & Examples

What Is Distributable Net Income (DNI)?

Distributable net income (DNI) is the amount a trust can pay to its beneficiaries. It plays an important role in taxation and is calculated using the trust’s taxable income, exemptions, and capital gains or losses. DNI helps minimize double taxation. The IRS uses DNI to guide how trusts and beneficiaries report taxes. It ensures that beneficiaries receive a steady income stream while benefiting from tax advantages.

How Distributable Net Income (DNI) Works

The Internal Revenue Service (IRS) considers distributable net income to be an estimate of the economic value that stems from a distribution to a beneficiary. A distribution is a payment made from an estate or an income trust to a beneficiary.

DNI is intended to provide trust beneficiaries with a reliable income source while minimizing the amount of income taxes paid by the trust.

Estates and non-grantor trusts, like individuals, must file income tax returns. Non-grantor trusts are funded by the grantor—the person or entity that creates the trust. But this kind of trust functions entirely on its own, as the grantor gives up control of the assets to the trust.

The income these trusts report is taxed at either the entity or beneficiary level. Which level is taxed depends on whether it is allocated to the principal amount or to the distributable income, and whether the amount is distributed to the beneficiaries. 

U.S. tax code allows estates and trusts to deduct the lesser of the required distributed trust income or the DNI, preventing double taxation.

An income trust recognizes distributable net income as an amount transferred to unitholders. With an estate trust, it’s the amount to be distributed to a beneficiary.

Important Points About Distributable Net Income (DNI)

Calculating distributable net income helps prevent double taxation of funds issued by a trust. The formula to calculate the figure is as follows:

• Distributable Net Income (DNI) = Taxable Income - Capital Gains + Tax Exemption

In instances where there are capital losses, that figure replaces the capital gains and is added to the formula instead of subtracted.

To calculate the taxable income, you need to add the interest income, dividends, and capital gains, then subtract any fees and tax exemptions.

Unlike for the DNI calculation, capital gains are added in the taxable income formula while capital losses are subtracted.

Comparing Distributable Net Income (DNI) and Net Income

Distributable net income is not the same as net income. DNI is the income distributed from a trust to its beneficiary or beneficiaries. Net income is used by a public company to calculate its earnings per share (EPS), which is the total profit of a company divided by the number of outstanding shares of its common stock. (Net income is also referred to as net earnings.)

Net income appears on a company's balance sheet and helps indicate how profitable the company is. To calculate its net income, companies subtract any general and administrative expenses, operating expenses, interest, taxes, other expenses, and the cost of goods sold (COGS) from the total amount of sales.

In a broader context, net income can mean an individual's take-home pay, which is earnings after deductions like taxes, healthcare, and insurance.

A person's net income can be contrasted with their gross income—the amount they earn before any deductions.

Practical Example: Calculating Distributable Net Income (DNI)

Here's an example of how DNI is calculated using a fictional trust we'll call ABC Trust. Let's say ABC Trust reported total income of $40,000. Interest income was $10,000 of this, while the remaining $30,000 was derived from dividends. Fees charged by the trust amounted to $3,000, and the trust realized a capital gain of $15,000. An exemption of $300 applied to the trust.

If we use the formula above, the trust's taxable income is $51,700:

• $51,700 = $10,000 (interest income) + $30,000 (dividends) + $15,000 (capital gain) - $3,000 (fees) - $300 (exemption)

We can then use this taxable income figure to calculate the DNI, which would be $37,000:

• $37,000 = $51,700 (taxable income) - $15,000 (capital gain) + $300 (exemption)

The Bottom Line

Distributable net income represents how much of a trust’s income can be given to its beneficiaries. It helps prevent double taxation and is calculated by taking the trust’s taxable income, subtracting capital gains, and adjusting for exemptions or losses. DNI sets the maximum taxable amount for beneficiaries, ensuring they get a steady income while keeping taxes low. It’s important to check exemptions regularly, especially when tax rules change.