Question

On January 5, 2015, Tim purchased a bond paying interest at 6 Jane. The bond pays 1,800 interest on December 31. Tim and Jane are cash basis taxpayers. When Jane collects the interest in December 2015, which of the following statements is correct?

1) Tim must include all of the interest in his gross income.
2) Jane must report 1,800 gross income for 2015.
3) Jane reports 1,350 of interest income in 2015, and Tim reports 450 of interest income in 2015.
4) Jane reports 450 of interest income in 2015, and Tim reports 1,350 of interest income in 2015.
5) None of these is correct.

Answer 1

Jane must report the full $1,800 in interest income for 2015 as she is the one who received the interest payment, and both she and Tim are cash basis taxpayers.

Step-by-step explanation:

When Tim purchased the bond paying interest at 6% on January 5, 2015, and the bond pays $1,800 in interest on December 31, 2015, the interest income should be reported by the individual who owns the bond at the time the interest is paid. Since Tim and Jane are cash basis taxpayers, the interest should be reported in the year it is received.

Therefore, the correct statement is: Jane must report $1,800 gross income for 2015. This is because as a cash basis taxpayer, Jane is required to report the income in the year it is received. If Tim held the bond for part of the year but did not receive any interest payments during his ownership period, he does not report any interest income for that year.