Question

Tyrone and Akira, who are married, incurred and paid the following amounts of interest during 2021:

Home acquisition debt interest $ 14,500
Credit card interest 4,800
Home equity loan interest (used for home improvement) 6,890
Investment interest expense 11,600
Mortgage insurance premiums (PMI) 1,000
Required:

With 2021 net investment income of $1,450, calculate the amount of their allowable deduction for investment interest expense and their total deduction for allowable interest. Home acquisition principal and the home equity loan principal combined are less than $750,000.

Deduction for investment interest expense ?

Total deduction for allowable interest ?

Answer 1

The allowable deduction for investment interest expense for Tyrone and Akira is $1,450, and their total deduction for allowable interest, including home acquisition debt and home equity loan interest, totals $22,840 for 2021.

Step-by-step explanation:

The question involves the calculation of the allowable deduction for investment interest expense and the total deduction for allowable interest for Tyrone and Akira, based on the provided expenses. Investment interest expense is deductible to the extent of net investment income. Since the net investment income for 2021 is $1,450, the deduction for investment interest expense is limited to this amount, even though the actual investment interest expense was $11,600.

The total deduction for allowable interest will include the home acquisition debt interest of $14,500 and the home equity loan interest of $6,890, since these types of interest are typically deductible on one's taxes when the loans are used for qualifying purposes such as buying, building, or improving a home and if the total principal does not exceed $750,000. Thus, the total deduction for allowable interest is $1,450 (limited investment interest expense) + $14,500 (home acquisition debt interest) + $6,890 (home equity loan interest), which adds up to $22,840. Note that credit card interest and mortgage insurance premiums are not generally deductible for personal expenses.

Answer 2

Tyrone and Akira can deduct a total of $1,450 for investment interest expense, limited to their net investment income for the year. The total deduction for all allowable interest, which includes home mortgage interest, home equity loan interest for home improvements, investment interest expense, and potentially mortgage insurance premiums, is $23,840 for 2021.

Step-by-step explanation:

To calculate the allowable deduction for investment interest expense for Tyrone and Akira for 2021, we must look at their net investment income, which is $1,450. This is the maximum amount they can deduct as investment interest expense since they cannot deduct more than their net investment income. Therefore, the deduction for investment interest expense is $1,450.

For total allowable interest deductions, the following types of interest are generally deductible on their taxes:

• 
  
• Home acquisition debt interest
• 
  
• Home equity loan interest (used for home improvement)
• 
  
• Investment interest expense (up to the limit of net investment income)

Mortgage insurance premiums (PMI) are also deductible for the tax year 2021, assuming they meet certain income requirements. However, personal interest, such as credit card interest, is not deductible.

Given this, their total deduction for allowable interest would be the sum of the home acquisition debt interest ($14,500), home equity loan interest ($6,890), and the deductible portion of the investment interest expense ($1,450), plus any potentially deductible mortgage insurance premiums ($1,000). This sums up to a total of $23,840.