Level 15

Deductions & credits

losses on selling mutual funds.  if you end up with a net capital loss (schedule D line 16) , up to $3,000 ($1,500) can be used to offset other income which would include dividends. it doesn't matter whether the dividends are from mutual funds or from stocks.    interest on loans used to buy investments including mutual funds is investment interest under the tracing rules for loans.  It is deductible on schedule A but only to the extent of net investment income.  it is reported on form 4952. so you need net investment income and have to itemize your deductions.    if, and only if, you itemize, any non-deductible interest due to investment income limitation is carried over to the following year



these items are not direct offsets of dividend income.  rather the deductible amount of net capital losses reduces adjusted gross income which includes dividend income .  qualified dividends would retain their character.   itemized deductions reduce adjusted gross income to get to taxable income.  .    


from 4952 instructions 

Net Investment Income

Gross income from property held for investment includes income,
unless derived in the ordinary course of a trade or business, from
interest, ordinary dividends (except Alaska Permanent Fund dividends),
annuities, and royalties. Include investment income reported to you on
Schedule K-1 from a partnership or an S corporation. Also include net
investment income from an estate or a trust.
Also include on line 4a (or 4d, if applicable) net passive income from a
passive activity of a publicly traded partnership (as defined in section
469(k)(2)). See Regulations sections 1.469-10 and 1.7704-1 (including
the transition rule of section 1.7704-1(l)), for details.
Net income from certain passive activities, such as rental of
substantially nondepreciable property, may have to be recharacterized
and included on line 4a. For details, see Pub. 925, Passive Activity and
At-Risk Rules, or Regulations section 1.469-2(f)(10).