Lea opened a savings account at her local bank in early January 20X1. She earned
ID: 2330091 • Letter: L
Question
Lea opened a savings account at her local bank in early January 20X1. She earned $5 of interest income in each month of the year. The bank credits that interest to her account on the last day of each month. Lea likes to let the interest accumulate over the year and then withdraw it at year-end. The bank credited her December interest on December 31, 20X1, but Lea couldn’t make it to the bank to make her annual withdrawal until January 2, 20X2. How much interest income will Lea be taxed on for the year 20X1?
Explanation / Answer
TOTAL INTEREST CREDITED BY BANK
= 5 $ X 12 MONTH (JANUARY TO DECEMBER )
= 60 $
INTEREST INCOME TAXABLE IN 20X1
= Total Interest Credited By The Bank
= 60 $
EXPLAINATION -
Interest income is Taxable on Cash Basis instead of Accrual Basis, Means it is subject to Tax in the year in which it is received.
Receiving of Interest means when it is Credited by the bank in Account.
Once interest Credited in Bank Account will be considered Received irrespective of whether this amount is Withdrawn or Spent or Transferred to another Account or kept in the same account.
CONCLUSION -
Thus Total Interest credited by the Bank 60 $ will be Taxed in the year 20X1 irrespective of the fact that it is withdrawn in 20X2.
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