Question

Matthew borrows $250,000 to invest in bonds. During the current year, his interest on the loan is $30,000. Matthew's taxable interest income from the bonds is $10,000. This is Matthew's only investment income.

a. Calculate Matthew's itemized deduction for investment interest expense for the year.

Answer 1

$20,000

Step-by-step explanation:

Interest payment on any loan or debt is a tax deductible expense. Similarly, interest income received is chargeable to tax.

In the given case, Matthew pays an annual expense of $ 30,000 in the form of interest on loan. Meanwhile, his taxable interest income for the period being $10,000.

a. Matthew can avail itemized deduction of net amount i.e $30,000 (expense) less $10,000 (income) i.e $20,000 can be claimed as a deduction for investment interest expense for the year.

Itemized deductions refer to those expenditures which qualify for deduction and are subtracted from an individuals adjusted gross income, leading to lower tax expenses.