Brandon and Jane Forte file a joint tax return and decide to itemize their deductions. The Forte's income for the year consists of $120,000 in salary, $1,000 interest income, $1,500 nonqualifying dividends, and $1,000 long-term capital gains. The Forte's expenses forthe year consist of $3,000 investment interest expense and $900 tax preparation fees. Assuming that the Forte's marginal tax rate is 30% and they make no special elections, what is the amount of investment interest expense deduction for the year?
A) $1,000.
B) $3,000.
C) $2,500.
D) Zero; investment interest expense is below two percent of AGI.
E) None of the choices are correct.

Question

Quizplus · Accepted Answer

The Forte's adjusted gross income (AGI) is $123,500 ($120,000 + $1,000 + $1,500 + $1,000). The investment interest expense deduction is limited to the extent of net investment income, which includes interest income and nonqualifying dividends. Therefore, the Forte's net investment income is $2,000 ($1,000 + $1,500). Since the investment interest expense of $3,000 exceeds the net investment income, the excess can be carried forward to future years. However, since the investment interest expense is not below two percent of AGI, it is fully deductible in the current year. The investment interest expense deduction is $2,000, which is the amount of net investment income.

Brandon and Jane Forte File a Joint Tax Return and Decide