Sebastian (age 46) and Kaitlin (age 45) are married and file a joint tax return. Their 2016 adjusted gross income is $390,000 and includes $2,600 in investment income ($2,000 in short-term capital gains and $600 of interest income). They provided 100% of the support for their daughter, Olivia, age 26, who lives with them, and earned $4,700 from her part-time job. They also provided 100 percent of the support for Sebastian's mother, Emily, who is 67, blind, and lives in a nursing home. Emily received $4,000 in Social Security benefits and $450 of interest income. Sebastian and Kaitlin also paid the following amounts in 2016:
$38,500 interest on their home mortgage (acquisition debt) on their principal residence purchased in 1995. The principal amount of the mortgage is $1,250,000. They also paid $11,000 in real estate taxes on the home.
$6,250 interest on a home equity loan (principal amount of $125,000) on their home. They spent $50,000 of the loan proceeds for remodeling their kitchen, $30,000 on a European vacation, and $45,000 for a new car.
$6,000 investment interest expense
$7,600 unreimbursed employee business expenses (none for meal or entertainment expenses)
$4,700 in state income taxes to the state of California where Sebastian worked for part of the year
$1,800 in state and local general sales taxes
$490 fee for preparation of their 2015 tax return, paid to their CPA in 2016
$2,500 contributed to the State University Athletic Booster Club (to allow them to purchase tickets in good seat locations for football games) and $1,000 contributed to the State University Business School Alumni Association for academic scholarships. They also donated a painting (purchased 11 years ago for $4,200) to the Salvation Army, which was then sold for it fair market value of $17,000 at its fundraising auction.
How much can Sebastian and Kaitlin deduct for interest expense for 2016?
a. $38,500
b. $38,400
c. $41,800
d. $49,500