Question 1

The investment interest expense deduction is limited to the taxpayer's net investment income.

Accepted Answer

According to the IRS, the investment interest expense deduction is limited to the taxpayer's net investment income. This means that the deduction cannot exceed the amount of income generated by the investments in a given year. Any excess interest expense can be carried forward to future years.

Question 2

Fran paid the following amounts of interest during 2019: $$\begin{array} { l r } 
\text { Qualified home mortgage interest } & \$ 7,000 \
\text { Automobile loan interest } & \$ 500 \
\text { Qualified interest on second residence } & \$ 5,000 \
\text { Credit card interest } & \$ 300
\end{array}$$ Calculate the amount of Fran's interest deduction for 2019.

Accepted Answer

The answer of Fran paid the following amounts of interest...

Question 3

Sally and Jim purchased their personal residence in Santa Barbara 20 years ago for $150,000. The home has a fair market value today of $1,000,000. For the current year, they have a $10,000 first mortgage on their home, on which they paid $1,000 in interest. They also have a home equity loan secured by their home with a balance throughout the year of $110,000. The proceeds of the home equity loan were used to send their two children to college. They paid interest on the home equity loan of $5,500 for the year.
Calculate the amount of their deduction for interest paid on qualified residence acquisition debt and qualified home equity debt for the current year.
Qualified residence acquisition debt interest:
Qualified home equity debt interest:

Accepted Answer

The answer of Sally and Jim purchased their personal residence...

Question 4

The interest paid on a loan used to acquire municipal bonds is not deductible.

Accepted Answer

According to IRS rules, the interest expenses on a loan used to purchase tax-exempt securities such as municipal bonds are not tax-deductible. This is because the income from the municipal bonds is tax-free, so deducting the interest expenses would result in a double tax benefit.

Question 5

Mortgage interest on a taxpayer's personal residence is not deductible on Schedule A.

Accepted Answer

Mortgage interest on a taxpayer's personal residence is deductible on Schedule A, subject to certain limitations.

Question 6

For the current tax year, David, a married taxpayer filing a joint return, reported the following: $\begin{array}{llcc}
  \text {  Investment income from interest} &\$24,000\
 \text {  Investment expenses other than interest} &\$3,000\
 \text {Interest expense on funds borrowed 10 years ago to purchase investment  } &\
 \text {property } &\$70,000\
\end{array}$
 What is the maximum amount that David can deduct in the current year as investment interest expense?

Accepted Answer

According to the information given, David reported $60,000 in investment income and $39,000 in investment interest expense. The maximum amount that he can deduct as investment interest expense is equal to his net investment income, which is $60,000 - $3,000 (the limit for other deductions) = $57,000. However, the investment interest expense is limited to the amount of investment income, so the maximum amount that David can deduct as investment interest expense is $39,000.

Question 7

Which of the following types of interest is not deductible?

Accepted Answer

Only credit card interest is not deductible. Qualified mortgage interest on primary residence and second residence are generally deductible.

Question 8

Andy borrows $20,000 to invest in bonds. During the current year, his interest on the loan is $2,000. Andy's interest income from the bonds is $400 and his investment expenses are $300.
​
a.Calculate Andy's itemized deduction for investment interest for this year.
b.Is Andy entitled to a deduction in future years?

Accepted Answer

The answer of Andy borrows $20,000 to invest in bonds....

Question 9

Bill has a mortgage loan on his personal residence. He decides to pay 18 months of interest ($2,000 per month or $36,000 total) in advance on October 1, 2019. How much of the advance interest payment can he deduct in 2019?

Accepted Answer

Bill can deduct only the amount of interest that accrues in 2019, which would be 3 months (October, November, and December), or $6,000 ($2,000 per month). The remaining $30,000 is deductible in future years as the interest accrues.

Question 10

Jerry and Ann paid the following amounts during the current year: $\begin{array}{llcc}
  \text {  Interest on automobile loan} &\$1,500\
 \text {Interest on bank loan (proceeds were used to purchase municipal bonds)  } &\$5,000\
 \text { Qualified home mortgage interest } &\$3,150\
\end{array}$
 What is the maximum amount they can use as interest expense in calculating itemized deductions for the current year?

Accepted Answer

The maximum amount they can use as interest expense in calculating itemized deductions for the current year is $3,150, which is the qualified home mortgage interest. Interest on automobile loans and bank loans for purchasing municipal bonds are not deductible as personal interest expenses.

Question 11

Charu is charged $70 by the state she lives in related to vehicle registration based on the weight of her personal auto. Charu can deduct the $70 as an itemized deduction.

Accepted Answer

Vehicle registration fees based on the weight of the vehicle are not deductible as an itemized deduction on federal income tax returns. Only the portion of the registration fee that is based on the value of the vehicle (ad valorem tax) can be deducted.

Question 12

What is the maximum amount of home equity debt (not acquisition debt) on which interest is fully deductible?

Accepted Answer

The Tax Cuts and Jobs Act of 2017 eliminated the deduction for interest on home equity debt not used to buy, build, or substantially improve the taxpayer's home. Therefore, the maximum amount of home equity debt on which interest is fully deductible is $0, unless the loan is used for those specific purposes.

Question 13

During 2019, Cary and Bill incurred acquisition debt on their residence of $1,300,000. They also borrowed $200,000 on a home equity line to pay college tuitions for their children. On a joint tax return, what is the amount of their qualified acquisition debt?

Accepted Answer

Only the mortgage used to acquire, build, or substantially improve the home is considered qualified acquisition debt. Therefore, the $1,300,000 acquisition debt is qualified, but the $200,000 home equity line is not. Therefore, the amount of their qualified acquisition debt is $1,300,000 - $200,000 = $1,100,000. However, the maximum amount of qualified acquisition debt for which interest can be deducted is $750,000 due to the Tax Cuts and Jobs Act of 2017. Therefore, the answer is (C) $750,000.

Question 14

Matthew purchases a new principal residence in the current year and pays points of $2,000 to obtain a mortgage loan. What is the proper tax treatment for the points paid?

Accepted Answer

Points paid on a mortgage for the purchase of a principal residence are generally fully deductible in the year they are paid, according to the IRS tax rules.

Question 15

To deduct interest paid with respect to indebtedness, the taxpayer must be legally liable for the debt.

Accepted Answer

To deduct the interest paid on a debt, the taxpayer must have a legal obligation to pay it. Simply paying someone else's debt or providing financial assistance does not qualify for interest deduction.

Question 16

Which of the following is not deductible as interest expense on Schedule A?

Accepted Answer

Loan fee charged for appraisal service is not deductible as interest expense on Schedule A.

Question 17

Shellie, a single individual, received her Bachelor's degree in 2018, and took a job with a salary of $45,000 per year. In 2019, she paid $1,500 of interest on qualified education loans. Which of the following statements is correct?

Accepted Answer

Option A is correct because the full $1,500 interest paid on qualified education loans is deductible in arriving at adjusted gross income (AGI) in 2019. This deduction is available even if the taxpayer does not itemize deductions.

Option B is not correct because the maximum amount of interest that can be deducted in arriving at AGI is $2,500, regardless of the amount of interest paid on qualified education loans. If Shellie's payment had been $3,000, she could still only deduct a maximum of $2,500 in arriving at AGI.

Option C is not correct because the phase-out for the deduction of education loan interest begins at a modified adjusted gross income (MAGI) of $70,000 ($140,000 for married filing jointly) in 2019. Shellie's MAGI of $45,000 is below this threshold.

Option D is not correct because taxpayers are allowed to deduct up to $2,500 of interest paid on qualified education loans in arriving at AGI in 2019.

Question 18

Amy paid the following interest expense during the current year: $\begin{array}{ll}
\text { Qualified home mortgage interest } & \$ 5,000 \
\text { Credit card interest } & \$ 1,000 \
\text { Personal bank loan interest } & \$ 3,000
\end{array}$
 What is the amount of Amy's interest deduction for the current year?

Accepted Answer

Amy can deduct the $5,000 qualified home mortgage interest. Credit card and personal bank loan interest are not deductible personal interest expenses.

Question 19

Which of the following interest expense amounts is not deductible in 2019?

Accepted Answer

Education loan interest deduction is phased out for single filers with modified adjusted gross income (MAGI) between $70,000 and $85,000 in 2019. Since the taxpayer's income is $150,000, they exceed the phase-out limit and cannot deduct the education loan interest.

Question 20

Douglas and Dena paid the following amounts of interest during the current year: $$\begin{array} { l r } 
\text { Qualified home mortgage interest } & \$ 14,000 \
\text { Other consumer interest } & \$ 5,000 \
\text { Investment interest } & \$ 10,000 \
\text { (no investment income) } &
\end{array}$$ ​ 
a.Calculate the amount of their allowable deduction for investment interest for the current year.
b.Calculate the amount of Douglas and Dena's total allowable deduction for interest for the current year.

Accepted Answer

The answer of Douglas and Dena paid the following amounts...

Quiz 5: Deductions for and From AGI