most appropriate way to report investment interest

[vijay-saikrishna]

Hi,

Through my brokerage account, I paid interest to invest in stocks and options. My short term gains exceeds the investment interest. When filing on turbotax, it looks like this investment interest isn't deductible on this capital gain by default. However, I can deduct on the non-qualified dividend income that I earned.

My questions are:

1. Let's say my investment interest is $2,500 and my dividend income is only $500. Can I deduct $500 this year for 2024 taxes and rollover the investment expense of remaining $2,000 to next year?
2. I beleive turbotax allows me to deduct this investment interest on the capital gains also. A quick YouTube search also told the same But it is not clear, which way is beneficial. How do I determine which route I should pick?
3. What is the rationale to not deduct investment interest on the capital gains? Because I literally used the margin interest to buy stocks and indeed made directly from that money in the same account.

[DavidD66]

You only have one choice for deducting your investment interest.  It is deductible as an itemized deduction, if you itemize, and the amount of the deduction is limited to the amount of net taxable investment income earned in the same year.  You can carry forward any unused investment interest expense.  

I believe what you are referring to when you mention deducting on non-qualified dividends is the choice to elect to treat net long-term capital gains or qualified dividends as investment income in order to deduct more of your investment interest. But if you do, that portion of the long-term capital gain or dividend will be taxed at ordinary-income rates.

[vijay-saikrishna]

No, I meant short term gains and not long term gains for the investment interest deductions. I am indeed doing itemized deductions.

Let's say I have $400 qualified dividends, $10,000 short-term gain and $1000 investment interest. Turbo tax is allowing me to either deduct upto $400 or rollover the investment interest to next year. I don't have any long term gains.

[ThomasM125]

You can rollover unused investment interest deduction to future years.

You can elect to treat capital gain income as investment income in order to allow for more of your investment interest to be deductible in the current year. The potential advantage of that is to get a larger investment interest deduction, thus potentially reducing your taxable income.

The disadvantage of doing that is the portion of your income equal to your capital gains will be taxed at ordinary tax rates, that are typically higher than your capital gain tax rates. So, you have the potential of lower taxable income, but higher tax rates on that income. 

The best way to determine which option is best would be to do it both ways and see which results in a lower tax.

You may find this article From the Tax Advisor helpful.