Understanding Undistributed Net Income: Key Legal Insights
Definition & Meaning
Undistributed net income refers to the portion of a trust's distributable net income that remains after certain amounts have been deducted. Specifically, it is calculated as the difference between the trust's distributable net income for a taxable year and the total of:
- The amounts specified in paragraphs (1) and (2) of section 661(a) of the Internal Revenue Code.
- The taxes imposed on the trust that are attributable to the distributable net income.
This concept is important for determining how much income is available for distribution to beneficiaries and for tax purposes.
Legal Use & context
Undistributed net income is primarily used in the context of trusts and estates. It plays a critical role in tax calculations and distributions to beneficiaries. Understanding this term is essential for trustees and beneficiaries alike, as it affects how income is reported and taxed. Users can manage related legal matters by utilizing templates and forms provided by US Legal Forms, which are drafted by experienced attorneys.
Real-world examples
Here are a couple of examples of abatement:
Example 1: A trust has a distributable net income of $100,000 for the year. If the amounts specified in section 661(a) total $60,000 and the taxes on the trust are $10,000, the undistributed net income would be $30,000.
Example 2: A trust with a distributable net income of $50,000 that has no amounts specified in section 661(a) and incurs $5,000 in taxes would have an undistributed net income of $45,000.
Relevant laws & statutes
The primary statute governing undistributed net income is found in the Internal Revenue Code, specifically 26 USCS § 665, which outlines the treatment of excess distributions by trusts. This statute defines how undistributed net income is calculated and its implications for taxation.