Texas Trust receives $10,000 interest on U.S. Treasury bonds and $15,000 interest on State of New York bonds. All $25,000 is distributed to the trust beneficiary, Gary. Which of the following statements is correct?
A)Gary has $25,000 of ordinary gross income.
B)Gary has $10,000 of taxable interest income and $15,000 of tax-free interest income.
C)Gary has no taxable income because the trust must pay the tax.
D)Gary has $10,000 of capital gain and $15,000 of tax-free interest income.

Question

Quizplus · Accepted Answer

The $10,000 interest received from U.S. Treasury bonds is taxable, while the $15,000 interest received from State of New York bonds may be tax-free, depending on the state where Gary resides. Therefore, Gary will have $10,000 of taxable interest income and $15,000 of tax-free interest income. The trust may have to pay taxes on its earnings, but Gary will still receive his portion of the earnings as taxable income. Therefore, options A, C, and D are incorrect.

Texas Trust Receives $10,000 Interest on U