Question 1

When both borrowed and owned funds are mingled in the same account, for purposes of categorizing interest expense, a repayment of the debt is allocated first to
A) personal expenditures.
B) trade or business expenditures.
C) investment expenditures.
D) passive activity expenditures in real estate.

Accepted Answer

The answer of When both borrowed and owned funds are...

Question 2

All of the following statements are true except
A) investment interest expense is deductible to the extent of a taxpayer's net investment income.
B) short-term capital gains meet the definition of net investment income.
C) investment interest expense includes interest expense to purchase or carry tax-exempt securities.
D) net investment income is the taxpayer's investment income in excess of investment expenses.

Accepted Answer

The answer of All of the following statements are true...

Question 3

Mingming is planning to purchase a new car and plans to borrow $15,000 to help finance the purchase. She has $50,000 of equity in her home so she is planning to take out a home equity loan. Mingming is in the 25% tax bracket. The bank is requiring an 8% interest rate on this loan. The car dealership has just announced a promotion lowering its interest rate on auto loans. In order for the auto dealership loan to be more attractive, the interest rate must be lower than
A) 8%.
B) 6%.
C) 4%.
D) 10%.

Accepted Answer

Mingming plans to borrow $15,000 to buy a new car and wants to take out a home equity loan. The bank is requiring an 8% interest rate on this loan. Home equity loan interest is tax-deductible up to a limit, and Mingming is in the 25% tax bracket. So the effective interest rate is:

Effective Interest Rate = Bank Interest Rate × (1 - Tax Deductible Percentage)
                             = 8% × (1 - 25%)
                             = 6%

To make the auto dealership loan more attractive than the home equity loan, its interest rate must be lower than 6%. Therefore, the best choice is B) 6%.

Question 4

Valeria owns a home worth $1,400,000, with a mortgage balance of $1,050,000. She borrows $200,000 to purchase a speedboat, using a home equity loan. What is the total amount of debt on which Valeria can deduct interest in the current year?
A) $1,000,000
B) $1,150,000
C) $1,050,000
D) $1,100,000

Accepted Answer

D)The maximum amount of indebtedness on which a taxpayer may deduct qualified residence interest is $1,100,000 if the individual has $100,000 or more in equity in the property.

Question 5

In the current year, Julia earns $9,000 in net investment income and incurs $14,000 of investment interest expense. What is the maximum amount of investment interest expense she is allowed to deduct this year?
A) $0
B) $3,000 deductible this year; $11,000 carried forward to next year
C) $9,000 deductible this year; $5,000 carried forward to next year
D) $14,000 deductible this year; nothing to be carried forward to next year

Accepted Answer

The maximum amount of investment interest expense Julia is allowed to deduct this year is limited to her net investment income of $9,000. The remaining $5,000 can be carried forward to next year. Therefore, option C is the correct answer.

Question 6

Which of the following is deductible as interest expense?
A) personal credit card interest
B) interest to purchase tax-exempt bonds
C) bank service charges on personal account
D) interest on a home equity loan to purchase a car

Accepted Answer

D)Interest on home equity loans is deductible.

Question 7

Phuong has the following sources of investment income: $$\begin{array} { | l | r | } 
\hline \text { Money market account interest } & \$ 2,000 \
\hline \text { Interest on State of New York bond } & 1,000 \
\hline \text { Dividends from domestic stocks } & 3,000 \
\hline \text { Long-term capital gain } & 4,000 \
\hline \text { Short-term capital gain } & 5,000 \
\hline
\end{array}$$ Barring any special elections, how much of the investment income will be included in calculating net investment income for purposes of the investment interest expense limitation?
A) $2,000
B) $7,000
C) $$5,000
D) $15,000

Accepted Answer

The answer of Phuong has the following sources of investment...

Question 8

Ted pays $2,100 interest on his automobile loan, $120 interest on a loan to purchase a computer for personal use, $630 interest on credit cards, and $1,100 investment interest expense. Ted has net investment income of $850. Ted's deductible interest is
A) $850.
B) $1,100.
C) $2,950.
D) $3,200.

Accepted Answer

The answer of Ted pays $2,100 interest on his automobile...

Question 9

Teri pays the following interest expenses during the year: $$\begin{array} { | l | r | } 
\hline \text { Home mortgage interest on personal residence } & \$ 8,500 \
\hline \text { Credit card interest on personal purchases } & 550 \
\hline \begin{array} { l } 
\text { Interest on loans used to purchase investments (Net investment } \
\text { income is } \$ 2,000 )
\end{array} & 2,400 \
\hline \text { Interest on loans used for a business conducted as a sole } \
\text { proprietorship } & 3,800  \
\hline\text { Interest on a credit card used exclusively in the business } &470\
\hline 
\end{array}$$ What is the amount of interest expense that can be deducted as an itemized deduction?
A) $10,500
B) $10,900
C) $14,300
D) $14,700

Accepted Answer

The correct answer is A because the only interest expense that can be deducted as an itemized deduction is the home mortgage interest on a personal residence.

Question 10

Nina includes the following expenses in her miscellaneous itemized deductions before application of the 2% of AGI floor: $$\begin{array} { | l | r | } 
\hline \text { Annual investment management fee } & \$ 3,700 \
\hline \text { Subscription to investment journals } & 300 \
\hline \text { Tax return preparation fee } & 1,500 \
\hline
\end{array}$$ Nina's AGI is $100,000. How much of the above-noted expenses will reduce her net investment income?
A) $4,000
B) $5,500
C) $3,000
D) $3,500

Accepted Answer

The answer of Nina includes the following expenses in her...

Question 11

Investment interest expense is deductible
A) as an offset to net investment income.
B) as a capital loss.
C) as an itemized deduction.
D) as a deduction for AGI.

Accepted Answer

The answer of Investment interest expense is deductible
A) as an...

Question 12

Christopher, a cash basis taxpayer, borrows $1,000 from ABC Bank by issuing a 3-month note on December 1, 2016. Christopher receives $940 but must repay $1,000 on the due date. The amount of interest expense deductible in 2016 is $20.

Accepted Answer

Cash basis taxpayers can only deduct the interest expense in the year it is actually paid. In this case, Christopher will pay the $1,000 on the due date which is in 2017, therefore he cannot deduct any interest expense in 2016.

Question 13

Valeria owns a home worth $1,400,000, with a mortgage balance of $950,000. She borrows $200,000 to purchase a speedboat, using a home equity loan. What is the total amount of debt on which Valeria can deduct interest in the current year?
A) $1,000,000
B) $950,000
C) $1,050,000
D) $1,100,000

Accepted Answer

Valeria can deduct interest on the mortgage balance of $950,000 and the home equity loan of $200,000, for a total of $1,150,000. However, the IRS limits the deduction of home equity loan interest to the lesser of $100,000 or the amount of equity in the home. In this case, the amount of equity in the home is $450,000 ($1,400,000 - $950,000), so Valeria can only deduct interest on the first $100,000 of the home equity loan. Therefore, the total amount of debt on which she can deduct interest is $1,050,000 ($950,000 + $100,000).

Question 14

Faye earns $100,000 of AGI, including $90,000 of salary and $10,000 of interest income. Faye does itemize her deductions. The miscellaneous category of her itemized deductions consists of $1,500 of unreimbursed employee business expenses and a $900 fee paid for investment advice. Faye has paid $11,000 of interest expense on a loan used to purchase stocks. How much of the $11,000 interest expense can be deducted this year?
A) $11,000
B) $10,000
C) $9,100
D) $9,600

Accepted Answer

Faye can deduct the interest expense on the loan up to the amount of her net investment income, which is $10,000 ($100,000 AGI - $1,500 - $900 = $97,600 taxable income - $10,000 interest income = $87,600 net investment income). Therefore, she can deduct $9,600 of the interest expense ($9,600 < $10,000).

Question 15

Riva borrows $10,000 that she intends to use for purchasing supplies for her business. She temporarily deposits the funds in her personal checking account. Prior to the deposit, the checking account held $40,000 of personal funds. Riva books a vacation for $6,000 and writes a check to the travel agency from her personal account. Later in the month, the business supplies bill arrives and Riva writes a check for $10,000 from the personal account. With respect to the interest expense on the $10,000 loan,
A) it will all be treated trade or business expense.
B) 60 percent will be treated as personal interest expense and 40 percent as trade or business expense.
C) it will all be treated as personal expense.
D) 20 percent will be treated trade or business expense.

Accepted Answer

The interest expense on the loan will be allocated between personal and business use based on the average annual balances of the personal and business accounts during the year. Since the loan proceeds were intended for business use, 40% of the interest expense will be treated as a trade or business expense and 60% will be treated as personal interest expense.

Question 16

While points paid to purchase a residence are deductible as interest in the period paid, points associated with the refinancing of a residence must be amortized and deducted over the life of the loan.

Accepted Answer

Points paid to purchase a residence are deductible as interest in the period paid, while points associated with the refinancing of a residence must be amortized and deducted over the life of the loan.

Question 17

On July 31 of the current year, Marjorie borrows $120,000 to purchase a new fishing boat. The loan is secured by her personal residence. On the date of the loan, the outstanding balance on the original debt incurred to purchase the residence is $300,000 and the FMV of the home is $450,000. What is the total amount of debt on which Marjorie can deduct interest in the current year?
A) $300,000
B) $400,000
C) $420,000
D) $450,000

Accepted Answer

B)The loan for the boat is home equity indebtedness.Interest on $300,000 of acquisition indebtedness plus $100,000 of the home equity indebtedness is allowed.The home equity indebtedness is the lesser of home equity of $150,000 or $100,000.

Question 18

Dana paid $13,000 of investment interest expense in a year in which she earned $4,500 in dividends, $5,400 in interest income, and had a short-term capital gain of $1,000 and a long-term capital gain of $2,200. The capital gains resulted from the sale of stock held as an investment. She has no other investment-related expenses. What is her maximum deduction for investment interest expense if Dana makes the proper elections to raise her ceiling as high as possible?
A) $5,400
B) $9,900
C) $13,100
D) $13,000

Accepted Answer

The answer of Dana paid $13,000 of investment interest expense...

Question 19

In 2015 Mario earned $9,000 in net investment income and incurred $14,000 of investment interest expense. Mario paid off the loan in early 2016 so he only paid $2,000 of investment interest expense in 2016. He earned $10,000 of net investment income in 2016. How much investment interest expense can Mario deduct in 2016?
A) $2,000
B) $10,000
C) $7,000
D) $0

Accepted Answer

In 2015, Mario had a net investment income of $9,000 and incurred $14,000 of investment interest expense. The excess interest expense of $5,000 can be carried forward to future years. In 2016, Mario earned a net investment income of $10,000 and paid $2,000 of investment interest expense. Since he had carried forward $5,000 of excess interest expense from 2015, he can deduct up to $7,000 of investment interest expense in 2016. Therefore, the correct answer is C.

Question 20

Takesha paid $13,000 of investment interest expense in a year in which she earned $4,500 in dividends, $5,400 in interest income, and had a short-term capital gain of $1,000 and a long-term capital gain of $2,200. The capital gains resulted from the sale of stock held as an investment. She has no other investment-related expenses. What is her maximum deduction for investment interest expense, assuming Takesha does not make any elections?
A) $5,400
B) $6,400
C) $13,100
D) $13,000

Accepted Answer

To calculate the maximum deduction for investment interest expense, we need to first calculate Takesha's net investment income, which is the sum of her interest income and capital gains, minus any investment expenses.

Net investment income = $5,400 + $1,000 + $2,200 - $0 = $8,600

Now we can calculate the maximum deduction for investment interest expense as follows:

Maximum deduction = lesser of (investment interest expense) or (net investment income - investment expenses)

In this case, the investment interest expense is $13,000, and there are no other investment expenses. Therefore:

Maximum deduction = lesser of ($13,000) or ($8,600) 
Maximum deduction = $6,400

Therefore, the answer is B.

Quiz 22: Itemized Deductions

When both borrowed and owned funds are mingled in the same account, for purposes of categorizing interest expense, a repayment of the debt is allocated first to

All of the following statements are true except

Valeria owns a home worth $1,400,000, with a mortgage balance of $1,050,000. She borrows $200,000 to purchase a speedboat, using a home equity loan. What is the total amount of debt on which Valeria can deduct interest in the current year?

In the current year, Julia earns $9,000 in net investment income and incurs $14,000 of investment interest expense. What is the maximum amount of investment interest expense she is allowed to deduct this year?

Which of the following is deductible as interest expense?

Ted pays $2,100 interest on his automobile loan, $120 interest on a loan to purchase a computer for personal use, $630 interest on credit cards, and $1,100 investment interest expense. Ted has net investment income of $850. Ted's deductible interest is

Investment interest expense is deductible

Christopher, a cash basis taxpayer, borrows $1,000 from ABC Bank by issuing a 3-month note on December 1, 2016. Christopher receives $940 but must repay $1,000 on the due date. The amount of interest expense deductible in 2016 is $20.

Valeria owns a home worth $1,400,000, with a mortgage balance of $950,000. She borrows $200,000 to purchase a speedboat, using a home equity loan. What is the total amount of debt on which Valeria can deduct interest in the current year?

While points paid to purchase a residence are deductible as interest in the period paid, points associated with the refinancing of a residence must be amortized and deducted over the life of the loan.