Question 1

Which of the following is deductible as interest expense?

Accepted Answer

Personal credit card interest and interest to purchase tax-exempt bonds are not deductible under current tax laws, and bank service charges are not considered interest.

Question 2

Investment interest expense is deductible

Accepted Answer

Investment interest expense is deductible as an itemized deduction, subject to limitations based on net investment income.

Question 3

Subject to net equity and dollar limitations, a taxpayer may deduct interest on a home equity loan, secured by the residence, used to purchase an automobile.

Accepted Answer

Interest on a home equity loan is only deductible if the loan was used to buy, build, or substantially improve the taxpayer's home, subject to certain dollar and net equity limitations. Using a home equity loan to purchase an automobile does not qualify for a tax deduction.

Question 4

In 2017, Mario earned $9,000 in net investment income and incurred $14,000 of investment interest expense. Mario paid off the loan in early 2018, so he only paid $2,000 of investment interest expense in 2018. He earned $10,000 of net investment income in 2018. How much investment interest expense can Mario deduct in 2018?

Accepted Answer

The answer of In 2017, Mario earned $9,000 in net...

Question 5

Taxpayers may elect to include net capital gain as part of investment income.

Accepted Answer

Taxpayers may choose to include net capital gain as part of investment income, which can affect their tax liability.

Question 6

Investment interest expense which is disallowed because it exceeds the taxpayer's net investment income may be carried over and treated as incurred in subsequent years.

Accepted Answer

This is true according to the tax code (Section 163(d)(4)(B)). The excess investment interest expense can be carried forward indefinitely and treated as investment interest expense in future years when the taxpayer has sufficient net investment income to offset it.

Question 7

All of the following statements are true except

Accepted Answer

Interest expense to purchase or carry tax-exempt securities is not considered investment interest expense because the income from these securities is not taxable.

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

Accepted Answer

Ted can only deduct investment interest expense up to the amount of his net investment income, which is $850.

Question 9

Qualified residence interest must be acquisition indebtedness and be secured by the residence.

Accepted Answer

According to IRS regulations, qualified residence interest must be acquisition indebtedness (meaning it was used to buy, build, or improve the residence) and must be secured by the residence.

Question 10

PG LLC is an accrual method partnership, manufacturing drones. Patty, 75% partner in PG and a cash method taxpayer, lends $100,000 to PG as a working capital loan on January 1, 2018, with interest due at an arms- length rate. PG accrues, and reports on its income statement, $5,000 of interest expense on this loan. PG pays the interest due to Patty on January 2, 2019. On PG LLC's 2018 tax return, it will deduct the $5,000 interest expense.

Accepted Answer

Under the related party rules, PG LLC cannot deduct the interest expense until it is paid, which occurs in 2019.

Question 11

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?

Accepted Answer

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

Question 12

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?

Accepted Answer

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

Question 13

Taxpayers may not deduct interest expense on most personal debt, including credit card debt, car loans, and other consumer debt.

Accepted Answer

According to IRS rules, taxpayers may only deduct interest expense on certain types of debt, such as home mortgage interest and investment interest. Personal debts, such as credit card debt and car loans, do not qualify for interest deduction.

Question 14

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

Accepted Answer

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

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,

Accepted Answer

The answer of Riva borrows $10,000 that she intends to...

Question 16

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?

Accepted Answer

The maximum amount of investment interest expense Julia can deduct is limited to her net investment income, which is $9,000. The remaining $5,000 can be carried forward to future years.

Question 17

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 for the purchase of a home are deductible in the year paid, while points paid for a refinancing must be amortized over the life of the loan.

Question 18

Christopher, a cash- basis taxpayer, borrows $1,000 from ABC Bank by issuing a 3- month note on December 1, 2018. Christopher receives $940 but must repay $1,000 on the due date. The amount of interest expense deductible in 2018 is $20.

Accepted Answer

A cash-basis taxpayer can only deduct interest when it is actually paid. Since the note is due in 2019, no interest is paid in 2018, so no deduction is allowed in 2018.

Question 19

Investment interest expense is deductible when incurred to purchase tax- exempt securities.

Accepted Answer

Investment interest expense is generally deductible only to the extent of investment income earned, and cannot be claimed if incurred to purchase tax-exempt securities because the interest income from those investments is not taxable.

Question 20

Acquisition indebtedness for a personal residence includes debt incurred to substantially improve the residence.

Accepted Answer

According to the IRS, acquisition indebtedness for a personal residence includes not only the original mortgage to buy the home but also any debt incurred to substantially improve the home, as long as it does not exceed the cost of the home.

Quiz 16: Tax Deductions and Travel Expenses for Employees and Self-Employed Individuals