Question

Teri pays the following interest expenses during the year: Home mortgage interest on personal residence $8,500 Credit card interest on personal purchases 550 Interest on loans used to purchase investments (Net investment income is $2,000) 2,400 Interest on loans used for a business conducted as a sole proprietorship 3,800 Interest on a credit card used exclusively in the business 470 What is the amount of interest expense that can be deducted as an itemized deduction? A) $10,500 B) $10,900 C) $14,300 D) $14,700

Answer 1

The correct answer for the question is Option A - $10,500. The amount of interest that can be deducted as an itemized deduction is the $8,500 home mortgage interest on personal residence and the $2,000 interest on loans used to purchase investments. Note that the amount of interest that can be deducted on loans for investments is limited to the net investment income and not the actual interest. The interest on loan for sole proprietorship and credit card usage is not a deductible interest expense and hence are not included in the calculation.

Option B is incorrect as $10,900 includes the total interest on loans for investments . However, this is limited to the net investment income and as such is not the valid answer.

Option C is incorrect. The $14,3000 includes the interest on loan for sole proprietorship which is incorrect. Interest expenses on loans obtained for sole proprietorship are not deducted and hence is incorrect.

Option D is incorrect. The $14,700 is incorrect answer based on the above considerations.

Please let me know if you have any questions via comments and all the best :)