On January 2, 2019, Tim purchased a bond paying interest at 6% for $30,000.On March 31, 2019, 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 2019:
A)Tim must include all of the interest in his gross income.
B)Jane must report $1,800 gross income for 2019.
C)Jane reports $1,350 of interest income in 2019, and Tim reports $450 of interest income in 2019.
D)Jane reports $450 of interest income in 2019, and Tim reports $1,350 of interest income in 2019.
E)None of these is correct.

Question

Quizplus · Accepted Answer

Since Tim and Jane are cash basis taxpayers, interest income is taxable to the taxpayer who owns the bond when the interest is paid. Tim owned the bond on December 31, 2019, when the interest of $1,800 was paid, so he must report the interest income. However, since he gave the bond to Jane on March 31, 2019, she is entitled to 3 months of interest income (January-March). That amount is $450 (3/12 x $1,800), which Jane must report as interest income on her tax return for 2019. Therefore, the correct choice is C.

On January 2, 2019, Tim Purchased a Bond Paying Interest