For 2011, Jorge, a single father, reported the following amounts relating to his investments:
Net investment income from interest $7000
Interest expense on a loan to purchase stocks $2000
Interest expense on funds borrowed in 2010 to purchase land for investment
What is the maximum amount that Jorge can deduct in 2011 as investment interest expense?
a. $1,000
b. $2,000
c. $6,000
d. $7,000
is the correct answer c
To determine the maximum amount that Jorge can deduct in 2011 as investment interest expense, we need to understand the rules and limitations set by the Internal Revenue Service (IRS).
According to the IRS, investment interest expense can be deducted if it is paid or incurred on debt used for investment purposes, such as purchasing stocks or land. However, there are certain limitations on the amount that can be deducted.
In the case of Jorge, we have three items related to his investments:
1. Net investment income from interest: $7,000
2. Interest expense on a loan to purchase stocks: $2,000
3. Interest expense on funds borrowed in 2010 to purchase land for investment: The amount is not mentioned.
To calculate the maximum deductible investment interest expense, we need to follow these steps:
Step 1: Determine Jorge's net investment income.
In this case, Jorge's net investment income from interest is $7,000.
Step 2: Calculate the investment interest expense limit.
The investment interest expense limit is generally equal to the net investment income. However, Jorge has an additional deduction related to the interest expense on funds borrowed to purchase land in 2010.
Since the amount for this interest expense is not provided, we cannot include it in the calculation. Therefore, we will only consider the interest expense on the loan to purchase stocks, which is $2,000.
Step 3: Compare the investment interest expense to the limit.
In this case, the limit is $7,000 (net investment income), and the actual investment interest expense is $2,000.
Since the actual investment interest expense is lower than the limit, the maximum amount that Jorge can deduct in 2011 as investment interest expense is $2,000.
Therefore, the correct answer is b. $2,000.