Question

Zach and Melissa Nieland file a joint tax return, and they itemize deductions. Assume their marginal tax rate on ordinary income is 25 percent. The Nielands incur $2,700 in miscellaneous itemized deductions, excluding investment expenses. They also incur $2,000 in noninterest investment expenses during the year. What tax savings do they receive from the investment expenses under the following assumptions: (Round your answer to the nearest whole dollar amount.)

a. Their AGI is $93,250.

Tax savings from investment expenses: ____?____

Answer 1

The Nielands have $4,700($2700+$2000) of miscellaneous itemized deductions including investment expenses.

These deduction are only deductible to the extent they exceed 2 percent of AGI. If AGI is $93,250, 2 percent of AGI is $1,865 ($93,250*2%)and $2,835 of the $4,700 is deductible.

The deductible portion is first treated as investment expense and then noninvestment miscellaneous itemized deductions. In this situation, all $2,000 of the investment expenses are deductible ($835 of the other miscellaneous itemized deductions are deductible).

The tax benefit of the investment expenses is $500 (i.e., $2,000 deduction × 25 percent marginal tax rate)