On June 30, 20x2, Jill, a cash-basis taxpayer, gave Tina a bond with a $25,000 f

Question

On June 30, 20x2, Jill, a cash-basis taxpayer, gave Tina a bond with a $25,000 face amount that pays $2,500 interest each December 31. When Tina collects the interest on December 31, 20x2, _____.

A. Jill must include all of the interest in her gross income.

B. Tina must include all of the interest in her gross income.

C. Jill must report $1,250 interest income, and Tina must report $1,250 interest income.

D. Jill must recognize $1,250 of interest income at the time of the gift.

E. Tina must recognize $25,000 of income at the time of the gift.

Please state and justify your response.

Explanation / Answer

A. Jill has gifted the bond to Tina on Jun 30, so Jill will not include all the interest in her income. She held the bonds till June 30, so she will report $1,250 of interest in her return.

B. Tina must not include all interest in her return. She held the bond from Jun 30. So she will include half of the interest in her income.

C. Jill and Tina should report $1250 interest income each in their return.

D. Jill will report $11000 ( excess of gift over $14000 exemption ) in her gift tax return as gift given on June 30. She will recognize interest on bond till June 30 =$1250. It needs to be disclosed in her annual return , not at the time of gift.

E. Tina need not recognize $ 25000 of income at the time of gift as Jill will report the corresponding taxable part in her gift tax return. The reciver of gift need not report the gift as income.

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