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

Question

Quizplus · Accepted Answer

Takesha's maximum deduction for investment interest expense is limited to the amount of her net investment income, which is calculated as follows:

Net Investment Income = Dividends + Interest Income + Short-Term Capital Gain + Long-Term Capital Gain - Investment Interest Expense
Net Investment Income = $4,500 + $5,400 + $1,000 + $2,200 - $13,000
Net Investment Income = $0

Since her net investment income is zero, her maximum deduction for investment interest expense is also zero. However, if her net investment income had been positive, her maximum deduction would have been equal to that amount, up to a maximum of $6,400 (the amount of investment interest expense in excess of net investment income). Therefore, the best choice is B.

Takesha Paid $13,000 of Investment Interest Expense in a Year