eBook Problem 8-50 Itemized Deductions (LO. 4) Stoycho and Selen are married, th
ID: 2423230 • Letter: E
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eBook Problem 8-50 Itemized Deductions (LO. 4) Stoycho and Selen are married, their marginal tax rate is 28%, and they have the following investment income for 2014 and 2015: 2014 $1,200 3,000 2,000 800 1,000 2015 $1,400 2,200 1,500 800 500 Interest on U.S. Treasury notes Cash dividends Interest on savings Interest on State of Montana bonds Net long-term capital gain Their adjusted gross income before considering the investment income is $84,000 in 2014 and $73,500 in 2015. Stoycho and Selen pay $9,000 in investment interest in 2014 and $5,000 in 2015. The investment interest is incurred to acquire all the investments in their portfolio Note: Do not round any division Complete the letter to Stoycho and Selen explaining how much investment interest they can deduct for 2014 and 2015 Dear Stoycho and Selen, I am writing to explain the deductions for 2014 and 2015 that relate to investment interest. First, deductible investment interest is limited to net investment income Second, a recap of the treatment for various investments which you hold is outlined below: . Interest received on municipal bonds is tax-exempt and therefore, excluded . The net long-term capital gains are taxed at income . Dividends receive special tax treatment and are taxed at a maximum Because of the preferential tax treatment, unless you elect otherwise, the dividends included as part of investment income for purposes of computing the allowable investment interest deduction 15 % and are also not included in the calculation of gross investment rate of 15 would not beExplanation / Answer
Answer: So ,in 2014 You had $3200 of investment income. You paid $9000 in interest to produce $7200 of taxable incoma and $800 of tax exempt income. The Portion of the interest related to the production of the tax-exempt income is not deductible . Therefore, $900 [$9,000 x ($800 ÷ $8,000)] of the interest is not deductible .Your investment interest expense is $8,100 ($9,000 - $900) .Because this amount exceeds your investment income, your investment interest deduction is limited to $3200.
Based on the same investment lineup as 2014 , in 2015 you have investment income of $2900. The $5000 of interest is paid to produce $5600 of taxable income and $800 of tax exempt income. Therefore,$625 [$5,000 x ($800 ÷ $6,400)] of the interest is not deductible. Your 2015 investment interest expense is $4,375 ($5,000 - $625). Because this exceeds your investment income, your deduction is limited to $2900.The remaining 2015 investment interest expense of $1475 and the 2014 carryforward of $4900 results in a 2016 carryforward of $6375.
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