Question

Required information [The following information applies to the questions displayed below.] Mickey and Jenny Porter file a joint tax return, and they itemize deductions. The Porters incur $2,825 in investment expenses. They also incur $4,375 of investment interest expense during the year. The Porters' income for the year consists of $166,500 in salary and $3,655 of interest income. a. What is the amount of the Porters' investment interest expense deduction for the year? b. What would their investment interest expense deduction be if they also had a ($2,385) long-term capital loss?

Answer 1

Step-by-step explanation:

a. To calculate the amount of the Porters' investment interest expense deduction, we need to determine the deductible amount based on their income and investment expenses.

The deductible amount of investment interest expense is limited to the amount of investment income. In this case, the Porters' investment income is $3,655. Therefore, the maximum deduction for investment interest expense would be $3,655.

b. If the Porters also had a ($2,385) long-term capital loss, we need to consider the impact on their investment interest expense deduction.

The deductible amount of investment interest expense is limited to the lesser of the investment income or the net investment income. Net investment income is calculated as the total investment income minus any investment expenses, including the long-term capital loss.

In this case, the net investment income would be $3,655 - $2,385 = $1,270. Since the Porters' investment income ($3,655) is higher than the net investment income ($1,270), the investment interest expense deduction remains unchanged at $1,270.

Therefore, the Porters' investment interest expense deduction would be $1,270 if they also had a ($2,385) long-term capital loss.