A trust whose assets are stocks and bonds generates $13,000 of distributable net income (DNI) during its current taxable year; $2,500 of this amount is tax-exempt interest on municipal bonds, while the remaining amount is made up of dividends.According to the trust instrument, the trustee may make discretionary distributions of trust income; during the current year $1,000 is distributed to beneficiary B.The taxable portion of this amount is

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As $2,500 of the $13,000 of DNI is tax-exempt interest on municipal bonds, only $10,500 is taxable. Of the $1,000 distributed to Beneficiary B, none of it is tax-exempt interest, so the entire $1,000 is taxable. To determine the portion of the $1,000 that is taxable, we must prorate the $10,500 of taxable income over the $13,000 of total DNI:

$1,000 distributed / $13,000 of DNI = 7.69%
7.69% of $10,500 taxable income = $808.

Therefore, the taxable portion of the $1,000 distributed to Beneficiary B is $808.

A Trust Whose Assets Are Stocks and Bonds Generates $13,000