Sarantuya, a college student, feels that now is a good time to buy stocks. However, because she doesn't have any savings, she decides to borrow $15,000 at an annual interest rate of 8 percent. She must make an interest-only payment each year for five years, plus repay the entire principal in Year Five. On August 1, 20X8, when Sarantuya obtained the loan, Sarantuya invested $10,000 in several individual stocks and used the remaining $5,000 to pay her tuition for the year. Assuming Sarantuya's investment income this year is greater than her investment interest expense this year, how much investment interest expense can she deduct in 20X8? (Round your intermediate calculations to the nearest whole percent.)
What will be an ideal response?
Sarantuya is allowed to deduct up to $335 in investment interest expense.
See calculations below:
Step 1: Interest expense for 20X8.
[$15,000 × 0.08 × (5 / 12)] = $500
Step 2: Proportion amount of loan used for investment and personal use.
Individual stocks: $10,000 / $15,000 = 67%
Tuition: $5,000 / $15,000 = 33%
Step 3: Use percentages from Step 2 to allocate the correct interest expense that is allowed to be deductible.
Investment interest expense: $500 × 67% = $335
Nondeductible personal interest: $500 × 33% = $165
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