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?

Question

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?

Quizplus · Accepted Answer

To calculate the maximum amount of investment interest expense that David can deduct, we need to use some specific rules from the IRS.This calculation is done on Form 4952.
Step 1: Calculate the deductible investment income.
Deductible investment income = Investment income - Investment expenses
= $24,000 - $3,000
= $21,000
Step 2: Calculate the maximum investment interest expense deduction.
Maximum investment interest expense deduction = Investment interest paid - Net Investment Income x 30%
= $70,000 - ($21,000 x 30%)
= $70,000 - $6,300
= $63,700
However, there is a limitation known as the "floor limitation" which states that the deduction for investment interest expense cannot exceed the taxpayer's net investment income. Therefore, the maximum amount that David can deduct in the current year as investment interest expense is $21,000.

For the Current Tax Year, David, a Married Taxpayer Filing