Beneficiary Terry received $40,000 from the Urgent Trust.Trust accounting income for the year was $50,000.The trust generated $30,000 in cost recovery deductions.How much can Terry deduct with respect to the cost recovery deductions that Urgent generated?

Question

Quizplus · Accepted Answer

Cost recovery deductions are used to offset trust income before it is distributed to beneficiaries. In this case, the trust generated $30,000 in cost recovery deductions, reducing the taxable income to $20,000 ($50,000 - $30,000). As Terry received $40,000 from the trust, he is entitled to deduct a portion of the cost recovery deductions based on his share of the taxable income. His share is two-thirds (40,000/60,000), which is equivalent to $20,000. Therefore, he can deduct two-thirds of the cost recovery deductions, which is $20,000 x 0.6 (60%), or $12,000. However, since the total cost recovery deductions generated by the trust is only $30,000, Terry can only deduct up to that amount. Therefore, the correct answer is B) $24,000.

Beneficiary Terry Received $40,000 from the Urgent Trust