purchased a bond on August 15, 2012 for $2,100. $200 of the purchase price represented accrued interest. She received $210 in interest income on the bond on December 1, 2012. What is the proper treatment of the $210 interest income for federal income tax purposes?
To determine the proper treatment of the $210 interest income for federal income tax purposes, we need to consider a few factors.
1. Accrued Interest: The $200 accrued interest that was part of the purchase price represents the interest that has accumulated from the bond's last interest payment date (often called the coupon date) up until the date of purchase. This accrued interest is considered taxable income to the buyer and must be reported on their federal income tax return.
2. Interest Income: The $210 interest income received on December 1, 2012, represents the interest earned by the bondholder from the purchase date (August 15, 2012) till December 1, 2012. This interest income is also considered taxable and needs to be reported on the federal income tax return.
To report the interest income for federal income tax purposes, follow these steps:
1. Determine the amount of interest income: In this case, the interest income is $210.
2. Report the accrued interest: Include the $200 of accrued interest in the total interest income. So the total interest income would be $210 + $200 = $410.
3. Complete the appropriate tax form: Report the interest income on Schedule B - Interest and Ordinary Dividends of your federal income tax return. Provide the required information such as the payer's name and the amount of interest income received.
It's important to note that if you received a Form 1099-INT from the bond issuer, you should use the information provided on that form to accurately report your interest income. This form will summarize the interest earned and accrued interest for the tax year.
As tax laws can be complex and subject to change, it's always a good idea to consult with a tax professional or use tax preparation software to ensure accurate reporting of your interest income for federal income tax purposes.