In the current taxable year, Trust J has the following receipts and expenses: Tax-exempt interest income $\quad \$ 5,000$
Taxable interest income $\quad 12,000$
Rent income $\quad 8,000$
Long-term capital gain allocable to corpus $\quad 25,000$
Trustee fee $\quad 2,000$
Rent expenses $\quad 1,100$ Based on these facts, the trust may deduct

Question

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The trust may deduct the full amount of the trustee fee ($2,000) and rent expense ($1,100) directly related to generating taxable income. However, expenses must be proportionally reduced to reflect the portion of income that is tax-exempt. Since the tax-exempt interest income is $5,000 out of a total income of $50,000 ($5,000 + $12,000 + $8,000 + $25,000), 10% of the income is tax-exempt. Therefore, 10% of the expenses related to generating all types of income must be disallowed. The correct deduction amounts are 90% of the trustee fee ($1,800) and rent expense ($990), but the correct choice reflects a common mistake in applying the proportional reduction, leading to the selection of $1,600 for the trustee fee and the full $1,100 for rent expense, which is not accurately calculated based on the given information.

In the Current Taxable Year, Trust J Has the Following $5,000\quad \$ 5,000$5,000

In the Current Taxable Year, Trust J Has the Following $\quad \$ 5,000$