Question

Theresa; a calendar year, cash basis taxpayer, had the following transactions during 2019: On March 31, 2019, she sold a corporate bond for $9,800. She purchased the bond on July 1, 2014 for $10,000. The sales price of $9,800 included $200 of accrued interest. On January 1, 2019, she began receiving payments from an annuity contract she purchased for $100,000. Under the terms of the contract, she will receive $500 per month for her life. The IRś table indicated her life expectancy is 22.4 years from the annuity starting date. She received $6,000 of payments during 2019, She received $600 from a City of Houston bond she has owned since July 15, 2015. She received $75 of interest on a state income tax refund. On July 1, 2019, she purchased a certificate of deposit for $20,000. The certificate's maturity value in two years (June 30, 2021) is $21,218. The effective interest rate is 3%. On January 2, 2019, she purchased a Series EE U.S. Savings Bond for $1,000. The redemption value at December 31, 2019 was $1,030. She filed no elections with respect to US Savings Bonds. How much interest income must Theresa recognize for 20197 $600 tax-exempt interest: $2,111 taxable interest $600 tax-exempt interest: $5,039 taxable interest O $690 tax exempt interest; $2,021 taxable interest O $675 tax-exempt interest: $2,036 taxable interest

Answer 1

Option ( A ).

Interest received from city of Houston bond is exempted from tax and interest on state income tax refund is taxable but state income tax refund is not taxable. Interest on bonds is taxable on accrual basis.