Brandon and Jane Forte file a joint tax return and decide to itemize their deductions. The Fortes' income for the year consists of $120,000 in salary, $1,000 interest income, $1,500 nonqualifying dividends, and $1,100 long-term capital gains. The Fortes' expenses for the year consist of $3,000 in investment interest expense and $900 in tax preparation fees. Assuming that the Fortes' marginal tax rate is 32 percent and they make no special elections, what is the amount of investment interest expense deduction for the year?
A)$0.
B)$1,000.
C)$2,500.
D)$3,000.
E)None of the choices are correct.

Question

Quizplus · Accepted Answer

The maximum deduction for investment interest expense is limited to net investment income. The Fortes have $1,000 interest income, $1,500 nonqualifying dividends, and $1,100 long-term capital gains for a total of $3,600 in net investment income. Therefore, the investment interest expense deduction is limited to $3,000, which is the amount of investment interest expense incurred by the Fortes. This deduction will reduce their taxable income and tax liability.

Brandon and Jane Forte File a Joint Tax Return and Decide