Question

Ramon incurred $83,100 of interest expense related to his investments this year. His investment income included $34,500 of interest and a $37,500 net capital gain on the sale of securities. Ramon has asked you to compute the amount of his deduction for investment interest, taking into consideration any options he might have. What is the maximum amount of Ramon's investment interest expense deduction in the current year?

A. $19,500.

B. $34,500.

C. $72,000.

D. $83,100.

E. None of the above

Answer 1

(C) $72,000

Step-by-step explanation:

The deduction for investment interest is limited to the amount of net investment income reported.

If Ramon elects to treat the net capital gain as investment income for purposes of computing the investment interest expense limitation, the deduction will be $72,000 ($34,500 interest + $37,500 net capital gain). If Ramon elects to include the capital gains as investment income, his $37,500 net capital gain will not qualify for beneficial alternative tax rate treatment.

Therefore, he must decide between the tax benefit of an additional deduction of $37,500 versus the benefit of the reduced tax rates applicable to net capital gain.