Question

On January 5, 2017, Tim purchased a bond paying interest at 6% for $30,000. On March 31, 2017, he gave the bond to Jane. The bond pays $1,800 interest on December 31. Tim and Jane are cash basis taxpayers. When Jane collects the interest in December 2017:_________

Answer 1

Jane will report the interest as income for the tax year she receives it, while Tim reported the interest for the period he owned the bond.

Step-by-step explanation:

When Jane collects the interest in December 2017, she will report it as income for the tax year she receives it, which is 2017. Since Tim is a cash basis taxpayer, he would have reported the $1,800 interest on December 31, 2017, when it was actually paid to him. Since Tim gave the bond to Jane on March 31, 2017, the interest that accrues from January 5, 2017, to March 31, 2017, would be reported by Tim as his income on his 2017 tax return.