# Investment Interest Expense Deduction: Step-by-Step Solution ## Given Information - **Investment expenses (other than interest):** $3,275 - **Investment interest expense:** $5,125 - **Salary:** $175,500 - **Interest income:** $4,285 - **Filing status:** Joint - **They itemize deductions** --- ## Part (a): Investment Interest Expense Deduction (No Capital Loss) ### Step 1: Understand Deduction Limit The deduction for investment interest expense is **limited to net investment income** for the year. - **Net investment income** = investment income (e.g., interest, dividends, royalties, annuities) **minus investment expenses (not interest)** ### Step 2: Calculate Net Investment Income Here, the Porters have: - **Interest income:** $4,285 - **Investment expenses (other than interest):** $3,275 \[ \text{Net investment income} = \$4,285 - \$3,275 = \$1,010 \] ### Step 3: Deduction Limit The **investment interest expense deduction** is limited to the **net investment income**: \[ \text{Deduction allowed} = \min(\$5,125, \$1,010) = \$1,010 \] ### Step 4: Carryforward The unused investment interest expense ($5,125 - $1,010 = $4,115) can be **carried forward** to future years. --- #### **Final Answer (a):** > **The Porters may deduct $1,010 of investment interest expense for the year.** --- ## Part (b): If They Also Had a ($2,595) Long-Term Capital Loss ### Step 1: Consider Capital Loss Impact - **Net investment income** can include **net capital gain** IF the taxpayer elects to treat all or part of it as investment income (but not losses). - **Capital losses** are **not included** in net investment income—they do **not increase** the limit. ### Step 2: Recalculate Net Investment Income - Investment income: $4,285 - Investment expenses (other than interest): $3,275 - **Long-term capital loss:** ($2,595) (does NOT increase net investment income) So, net investment income **remains**: \[ \$4,285 - \$3,275 = \$1,010 \] ### Step 3: Deduction Allowed Still limited to **$1,010**. --- #### **Final Answer (b):** > **The Porters’ investment interest expense deduction would still be $1,010, even with the $2,595 long-term capital loss.** --- ## **Summary Table** | Situation | Deduction Allowed | |----------------------------------------|-------------------| | (a) No capital loss | $1,010 | | (b) With $2,595 capital loss | $1,010 | --- ### **Key Points** - **Net investment income** does **not** include capital losses. - **Investment interest expense deduction** is limited to **net investment income** after subtracting investment expenses (other than interest). - **Carryforward** any unused investment interest expense to future years.