Answer:
a.
$1,400
b.
$280
Explanation:
According to Internal Revenue code the interest expense can only be deductible as adjusted gross income deduction, if the qualified education loan is used only for study credit, higher educational expenses like enrollment in the course, cost of books and accommodation cost.
a.
The maximum allowable interest deduction is $2,500.
Amount of Interest paid on the educational loan $1,400
Allowable deduction is Lesser of
- maximum allowable interest deduction of $2,500.
- Interest Payment on educational loan of $1,400.
b.
Adjusted Gross Income $77,000
Formula
Educational Interest rate = (AGI - $65,000) / $15,000
Placing values in the formula
Educational Interest rate = ($77,000 - $65,000) / $15,000
Educational Interest rate = 1.13 = 0.8%
Allowable interest deduction = [ (lesser of interest deduction or interest payment on the educational loan) x ( 1 - Educational interest rate)
Allowable interest deduction = $1,400 x ( 1 - 0.8 ) = $280
