C is corrent. Interest paid on debt incurred to purchase tax exempt obligations is nondeductible. Similarly, interest on the automobile loan is considered personal interest and not deductible. The $1,800 interest on the home mortgage and the home mortgage prepayment penalty of $1,200 are qualified residence interest and will give the Parsells a total interest deduction of $3,000.
A is incorrect. The maximum interest deduction is $3,000.
B is incorrect. The maximum interest deduction is $3,000.
D is incorrect. The maximum interest deduction is $3,000.
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