In 2020, Kathleen Tweardy incurs $30,000 of interest expense related to her investments. Her investment income includes $7,500 of interest, $6,000 of qualified dividends, and a $12,000 net capital gain on the sale of securities. Kathleen asks you to compute the amount of her deduction for investment interest, taking into consideration any options she might have.a. If Kathleen elects not to treat the capital gain and qualified dividends as investment income for purposes of the investment interest expense limitation, her deduction will be?b. If Kathleen elects to treat the capital gain and qualified dividends as investment income for purposes of the investment interest expense limitation, her deduction will be?c. In addition, Kathleen wants your suggestions as to any tax planning alternatives that are available. Complete the letter to her that contains your advice. Young, Nellen, Raabe, Hoffman, & Maloney, CPAS5191 Natorp BoulevardMason, OH 45040February 27, 2021Ms. Kathleen Tweardy11934 Briarpatch DriveMidlothian, VA 23113Dear Ms. Tweardy:In our recent meeting, you asked me to determine the amount of your investment interest deduction for 2020. The amount of thededuction depends on choices made regarding the treatment of the capital gain on the sale of securities and the qualifieddividends.The deduction for investment interest is limited to the amount of net investment income reported. If you choose not to treat thecapital gain and qualified dividends as investment income for purposes of the investment interest expense limitation, yourdeduction will be $However, if you elect to treat these items as investment income, the deduction becomes The maximum rate applicable to the capital gain and qualified dividends is%, whereas other income may besubject to income tax rates as high as% (assuming that the surtax on net investment income does not apply).If treated as investment income, the $capital gain and $of qualified dividends will not qualifyfor the beneficial capital gains tax rate. Therefore, you must decide between the tax benefit of an additional deduction ofversus the benefit of the applicable reduced rates.Due to the complexities of the capital gain provisions, we will need to meet again to obtain additional information that is relevantto the election available. Please call me at (510) 555-1234 to schedule an appointment. Thank you for consulting with my firm onthis matter, and we look forward to serving you in the future.Sincerely,Julie Morgan, CPAPartner

Capital gain is the income earned on the sale of capital asset.

Answered: In 2020, Kathleen Tweardy incurs…

Individual Income Taxes

43rd Edition

ISBN:9780357109731

Author:Hoffman

Publisher:Hoffman

Chapter11: Investor Losses

Section: Chapter Questions

Problem 63P

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In 2020, Kathleen Tweardy incurs $30,000 of interest expense related to her investments. Her investment income includes $7,500 of interest, $6,000 of qualified dividends, and a $12,000 net capital gain on the sale of securities. Kathleen asks you to compute the amount of her deduction for investment interest, taking into consideration any options she might have.

a. If Kathleen elects not to treat the capital gain and qualified dividends as investment income for purposes of the investment interest expense limitation, her deduction will be?

b. If Kathleen elects to treat the capital gain and qualified dividends as investment income for purposes of the investment interest expense limitation, her deduction will be?

c. In addition, Kathleen wants your suggestions as to any tax planning alternatives that are available. Complete the letter to her that contains your advice.

Young, Nellen, Raabe, Hoffman, & Maloney, CPAS
5191 Natorp Boulevard
Mason, OH 45040
February 27, 2021
Ms. Kathleen Tweardy
11934 Briarpatch Drive
Midlothian, VA 23113
Dear Ms. Tweardy:
In our recent meeting, you asked me to determine the amount of your investment interest deduction for 2020. The amount of the
deduction depends on choices made regarding the treatment of the capital gain on the sale of securities and the qualified
dividends.
The deduction for investment interest is limited to the amount of net investment income reported. If you choose not to treat the
capital gain and qualified dividends as investment income for purposes of the investment interest expense limitation, your
deduction will be $
However, if you elect to treat these items as investment income, the deduction becomes

The maximum rate applicable to the capital gain and qualified dividends is
%, whereas other income may be
subject to income tax rates as high as
% (assuming that the surtax on net investment income does not apply).
If treated as investment income, the $
capital gain and $
of qualified dividends will not qualify
for the beneficial capital gains tax rate. Therefore, you must decide between the tax benefit of an additional deduction of
versus the benefit of the applicable reduced rates.
Due to the complexities of the capital gain provisions, we will need to meet again to obtain additional information that is relevant
to the election available. Please call me at (510) 555-1234 to schedule an appointment. Thank you for consulting with my firm on
this matter, and we look forward to serving you in the future.
Sincerely,
Julie Morgan, CPA
Partner

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