Qualified dividends are subtracted from your net investment income because they have a special tax rate that is lower than your ordinary rate. This is done on line 4c of Form 4952, Investment Interest Expense Deduction.
As Mike9241 points out, you are allowed to elect that a portion of your qualified dividends be included in your investment income. This is done on line 4g of Form 4952.
This would allow more of a deduction for your margin interest, but it would also increase your exposure to the Net Investment Tax and increase your tax rate on the amount of qualified dividends. Because of that, it is hard to predict whether this election would reduce your taxes.
You can complete the election in TurboTax Desktop, but the option is not available in TurboTax Online. If you have started your return in TurboTax Online and want to change to the Desktop version, click here for more information.
This is how to enter it in TurboTax Desktop:
- Select Federal Taxes toward the upper left.
- Select Deductions and Credits just below it.
- Select, I'll choose what I work on, on the right.
- Scroll down to Retirement and Investments.
- Click Start or Update to the right of Investment Interest Expenses.
- Answer the first question Yes.
- Click Continue until you get to Make a Capital Gain Election.
- Read the first sentence carefully. It will tell you how much you can elect to treat as investment income.
- Enter the amount you want to treat as investment income.
Once you make this election by filing your return, you can't change it without IRS permission.
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