Financial Planner

Answer: A - The type of trust income that must first be allowed by state law versus IRS statue is capital gains. Trust accounting income includes interest, dividends, rents, royalties, and other items; however, capital gains may also be included in the income of the trust if allowed by state law. Accounting income does not include distributable net income. Interest that is tax-exempt to an individual is also tax-exempt to a trust. Capital gain and capital loss rules that apply to individual also apply to estates and trusts. The rules that apply to reporting ordinary gains and losses for an individual also apply to trusts and estates.