Question 1

Christopher,a cash-basis taxpayer,borrows $1,000 from ABC Bank by issuing a 3-month note on December 1,2017.Christopher receives $940 but must repay $1,000 on the due date.The amount of interest expense deductible in 2017 is $20.

Accepted Answer

He is a cash-basis taxpayer and does not pay the interest until the following year.

Question 2

Teri pays the following interest expenses during the year:

What is the amount of interest expense that can be deducted as an itemized deduction?

Accepted Answer

A)
 11ea7e84_1f08_459b_9a0a_b71ecbd00dd3_TB1260_00 Personal interest is not deductible. Interest for the business is deducted as a for AGI deduction on Schedule C.

Question 3

Wayne and Maria purchase a home on April 1 of the current year.In order to obtain a thirty-year mortgage,they are required to pay $7,200 in points at closing.Charging points is a customary business practice in the area.In addition,they pay $4,400 of interest during the year.What is their current year deduction related to their home?

Accepted Answer

D) Points on the purchase of a home are deductible in the year paid, provided certain requirements are met.

Question 4

Investment interest expense is deductible

Accepted Answer

C) Investment interest expense, after the net investment income ceiling is applied, is an itemized deduction.

Question 5

Phuong has the following sources of investment income:

Barring any special elections,how much of the investment income will be included in calculating net investment income for purposes of the investment interest expense limitation?

Accepted Answer

B) Only the money market account interest and the short-term capital gain will be included.

Question 6

Valeria owns a home worth $1,400,000,with a mortgage balance of $1,050,000.She borrows $200,000 to purchase a speedboat,using a home equity loan.What is the total amount of debt on which Valeria can deduct interest in the current year?

Accepted Answer

D) The maximum amount of indebtedness on which a taxpayer may deduct qualified residence interest is $1,100,000 if the individual has $100,000 or more in equity in the property.

Question 7

Nina includes the following expenses in her miscellaneous itemized deductions before application of the 2% of AGI floor:

Nina's AGI is $100,000.How much of the above-noted expenses will reduce her net investment income?

Accepted Answer

D)
 11ea7e84_1f08_1e88_9a0a_675f534aa17f_TB1260_00

Question 8

Which of the following is deductible as interest expense?

Accepted Answer

D) Interest on home equity loans is deductible.

Question 9

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

B) Her investment income ceiling will only include the interest income and the short-term capital gain so the deduction for investment interest expense is limited to $6,400. The dividend income and long-term capital gain will not be included in her investment income ceiling without a special election.

Question 10

All of the following statements are true except

Accepted Answer

C) Investment interest does not include interest expense incurred to purchase or carry tax-exempt securities.

Question 11

On July 31 of the current year,Marjorie borrows $120,000 to purchase a new fishing boat.The loan is secured by her personal residence.On the date of the loan,the outstanding balance on the original debt incurred to purchase the residence is $300,000 and the FMV of the home is $450,000.What is the total amount of debt on which Marjorie can deduct interest in the current year?

Accepted Answer

B) The loan for the boat is home equity indebtedness. Interest on $300,000 of acquisition indebtedness plus $100,000 of the home equity indebtedness is allowed. The home equity indebtedness is the lesser of home equity of $150,000 or $100,000.

Question 12

In 2016,Mario earned $9,000 in net investment income and incurred $14,000 of investment interest expense.Mario paid off the loan in early 2017,so he only paid $2,000 of investment interest expense in 2017.He earned $10,000 of net investment income in 2017.How much investment interest expense can Mario deduct in 2017?

Accepted Answer

C) Mario has $7,000 of potentially deductible investment interest expense-the $2,000 paid in 2017 and the $5,000 carryover from 2016. The investment interest expense can be deducted up to a ceiling of net investment income which is $10,000. The entire $7,000 investment interest expense available can be deducted in 2017.

Question 13

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

C) Investment interest expense is deductible to the extent of net investment income. The remainder is carried over to the next tax year.

Question 14

Faye earns $100,000 of AGI,including $90,000 of salary and $10,000 of interest income.Faye does itemize her deductions.The miscellaneous category of her itemized deductions consists of $1,500 of unreimbursed employee business expenses and a $900 fee paid for investment advice.Faye has paid $11,000 of interest expense on a loan used to purchase stocks.How much of the $11,000 interest expense can be deducted this year?

Accepted Answer

D) Deduction of investment interest expense is limited to net investment income. Net investment income includes the $10,000 interest income, but is reduced by investment-related expenses remaining after the 2% of AGI floor is applied to the miscellaneous deduction category.
 11ea7e84_1f08_1e89_9a0a_d39298896449_TB1260_00 $9,600 of the $11,000 interest expense is currently deductible, and the balance carries over.

Question 15

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

A) When the taxpayer repays the debt, the tax law requires that the allocation of the repayment to the expenditures made with the borrowed funds occur in the following order: (1) personal expenditures, (2) investment expenditures and passive activity expenditures other than rental real estate, (3) passive activity expenditures in rental real estate, and (4) trade or business expenditures.

Question 16

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

B) If borrowed and personal funds are mingled in the same account, expenditures from that account are treated as coming first from borrowed funds. Therefore, the $6,000 vacation payment is considered as coming from borrowed funds, and only $4,000 of the business supply bill is treated as coming from borrowed funds. Accordingly, the interest expense will be allocated 60% to personal use and 40% to business use.

Question 17

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

D) If she makes the appropriate election on her return to include the dividends and long-term capital gain in her ceiling, she can deduct the investment interest expense to the extent of net investment income including the dividends and long-term capital gain. $4,500 + $5,400 + $1,000 + $2,200 = $13,100 limited to $13,000 of investment interest expense.

Question 18

Valeria owns a home worth $1,400,000,with a mortgage balance of $950,000.She borrows $200,000 to purchase a speedboat,using a home equity loan.What is the total amount of debt on which Valeria can deduct interest in the current year?

Accepted Answer

C) The home equity indebtedness is limited to $100,000. This is in addition to the acquisition indebtedness of $950,000.

Question 19

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

A) Only the investment interest expense, to the extent of net investment income of $850 is deductible.

Question 20

Mingming is planning to purchase a new car and plans to borrow $15,000 to help finance the purchase.She has $50,000 of equity in her home so she is planning to take out a home equity loan.Mingming is in the 25% tax bracket.The bank is requiring an 8% interest rate on this loan.The car dealership has just announced a promotion lowering its interest rate on auto loans.In order for the auto dealership loan to be more attractive,the interest rate must be lower than

Accepted Answer

B) The interest expense on the home equity loan will be deductible so its after-tax cost will be 6% (8% * [1 - .25 marginal tax rate]).

Quiz 7: Itemized Deductions