Jarret owns City of Charleston bonds with an adjusted basis of $190,000. During the year, he receives interest payments of $3,800. Jarret partially financed the purchase of the bonds by borrowing $100,000 at 5% interest. Jarret's interest payments on the loan this year are $4,900, and his principal payments are $1,100.
a. Should Jarret report any interest income this year? Explain.
b. Can Jarret deduct any interest expense this year? Explain.