Clay incurs $5,000 of investment interest expense related to purchasing Renco Company stock and New Orleans municipal bonds. He receives $6,000 of dividends on the stock and $14,000 of interest on the bonds. The amount of investment interest expense Clay can deduct is:

a. $ - 0 -.

b. $1,500.

c. $2,500.

d. $3,500.

e. $5,000.

e. $5,000.

Explanation:

To calculate deductible investment interest expense, we have to know the followings:

total investment income for investments total investment interest expenses (for loans used to purchase taxable investments)

As IRS guided, if the expenses are less than net investment income, the entire investment interest expense is deductible; and if the interest expenses are more than the net investment income, we can deduct the expenses up to the net investment income amount. The rest of the expenses are carried forward to next year.

In this scenario, Clay have total $20,000 investment income from dividends on the stock and interest on the bond, while his interest expenses is $5,000 only, lower than less than net investment income.

So Clay's entire investment interest expense ~ $5,000 is deductible