Can someone please explain why the below answer to the question is correct. I thought that investment interest expense is only deductible up to the net investment income. The question states that the Crawleys had net investment income of $3,000 so should the interest expense be deductible up to $3,000.
Phil and Joan Crawley made the following payments during 2015:
Interest on bank loan (loan proceeds used to purchase U.S. Series HH savings bonds) $4,000
Credit card interest $500
Interest on home mortgage for period April 1 to December 31, 2015 $2,700
Points paid to obtain conventional mortgage loan on April 1, 2015 $900
The Crawleys had net investment income of $3,000 for the year. What is the maximum amount that the Crawleys can deduct as interest expense in calculating itemized deductions for 2015?
A. $7,600
B. $3,600
C. $6,600
Answer (C) is correct.
The interest on U.S. savings bonds is taxable, and interest is deductible on the loan to purchase them. Investment interest expense is deductible only to the extent of net investment income. The interest on the credit card is personal interest, none of which is deductible. The home mortgage interest is deductible assuming it is qualified residence interest. The points on a conventional mortgage loan are deductible even though the points represent prepaid interest. The Crawleys’ maximum interest deduction is
Interest on bank loan $3,000
Interest on home mortgage 2,700
Points 900
Interest deduction $6,600
D. $7,100
.