ExpertHard1 markMultiple Choice
CPA · Question 40 · Area IV: Individual Taxation
A taxpayer has $5,000 of investment interest expense in the current year. The taxpayer has $3,000 of interest income and $2,000 of qualified dividends. The taxpayer does NOT elect to treat the qualified dividends as investment income. What is the investment interest expense deduction?
A taxpayer has $5,000 of investment interest expense in the current year. The taxpayer has $3,000 of interest income and $2,000 of qualified dividends. The taxpayer does NOT elect to treat the qualified dividends as investment income. What is the investment interest expense deduction?
Answer options:
A.
$5,000
B.
$3,000
C.
$5,000, but the qualified dividends are taxed at ordinary rates.
D.
$0
How to approach this question
Investment Interest Deduction is limited to Net Investment Income. NII includes Interest, Non-Qual Dividends, STCG. It EXCLUDES Qualified Dividends and LTCG unless you elect to tax them at ordinary rates.
Full Answer
B.$3,000✓ Correct
B
Investment interest expense is deductible only to the extent of net investment income. Net investment income generally excludes qualified dividends and LTCG (which get preferential rates). Since the taxpayer did not elect to include them, NII = $3,000 (interest). Deduction limited to $3,000. Carryforward $2,000.
Common mistakes
Including qualified dividends in NII without the election.
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