The amount that Wolfe can utilize as interest expense in calculating itemized deductions for 2021 is: $4,200. See the explanation below.
<h3>How is the above figure arrived at?</h3>
The Internal Revenue Code allows for a deduction for certain interest paid or incurred on debts during the year. Investment interest can be deducted by taxpayers up to the amount of their net investment income for the year.
Personal or consumer interest has been forbidden since 1990. Mortgage interest on a qualified home is deductible. Under the IRC, interest on debt incurred to buy or carry tax-exempt securities is not deductible.
Given that Wolfe utilized two-thirds of the Union National Bank loan to acquire tax-exempt securities, two-thirds of the interest on this loan is not deductible. Wolfe may make a deduction of:
$3,600 x 1/3 (Union National Bank)
= $1,200
+
Interest on Home Mortgage
$3,000
Hence, total interest payable =
1,200 + 3000
= $4,200
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