Question

charles wolfe purchased the following long-term investments at par during 2021: $20,000 general obligation bonds of burlington county (wholly tax-exempt) $10,000 debentures of arrow corporation wolfe financed these purchases by obtaining a $30,000 loan from union national bank. for 2021, wolfe made the following interest payments: union national bank $3,600 qualified residence interest on home mortgage 3,000 credit card interest 500 wolfe’s net investment income for the year was $10,000. what amount can wolfe utilize as interest expense in calculating itemized deductions for 2021? $4,700 $6,600 $7,100 $4,200

Answer 1

The amount that Wolfe can utilize as interest expense in calculating itemized deductions for 2021 is: $4,200. See the explanation below.

How is the above figure arrived at?

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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