Deductions & credits

Dear abufreddy:

Potentially, yes.  But this is a long and detailed answer, so please read the information carefully to find the answer applicable to your specific circumstances.

What is the investment interest expense deduction?

If you borrow money to finance investments, the interest you pay is considered investment interest. Examples include margin interest your broker charges you on loans to buy stocks, and interest you pay on money you borrowed to buy raw land for speculation. If you have investment interest expense, you can deduct it up to the amount of your net investment income.

Do I qualify for the investment interest expense deduction?

Eligibility requirements

 - You must be an investor who borrows money to buy investments, and receives interest, dividends, capital gains, royalties, or other investment income.

 - You must itemize your deductions on Schedule A.

Limitations of this deduction

You can deduct interest expense only up to the amount of your net investment income. Your net investment income is your investment income minus investment expenses (other than interest expense). Examples of investment expenses include safe deposit box fees, investment advisory fees, and the cost of investment publications, such as magazine subscriptions. Investment expenses also include depreciation and depletion of assets that produce investment income (such as a computer), and investment expenses reported to you on a Schedule K-1 from a partnership or an S corporation.

 - You can deduct any interest expense that is greater than your net investment income. You deduct it from next year's interest income, and then carry forward any remaining amounts to future years.

 - If you borrow for business or personal purposes as well as investment, you can deduct only the interest expense on the part borrowed for investment purposes.

 - You can deduct only interest that you actually pay. You cannot deduct interest that is added to the amount you owe, such as life insurance loan interest added to the loan principal.

 - You cannot deduct prepaid interest you pay in the current tax year that is not actually due until future tax years.

 - Limits apply if you borrow to buy treasury bills or market discount bonds.

You generally cannot deduct:

 - Interest on loans to buy tax-free securities such as tax-exempt bonds

 - Personal interest, credit card fees, loan fees, and credit investigation fees

 - Interest expenses related to a passive activity such as rental real estate, or a limited partnership or S corporation that you're not actively involved in

 - Interest related to options straddle strategies

Special circumstances

Investment interest income includes the following:

 - Portfolio income (dividends, royalties, or interest from non-business activities) received as a partner of a limited partnership or a shareholder of an S corporation (even where you're not actively involved). These are reported separately on the Schedule K-1 statement you receive.

 - Interest or royalties from a working interest in oil and gas wells and partnerships

 - Interest received from an estate or trust

 - Your child's dividends and interest that you choose to report on Form 8814, Parent's Election to Report Child's Interest and Dividends

 - If you have qualified dividends and net capital gains, you can include it as part of investment income in order to be able to deduct more of your investment interest expense in the current year. But if you do so, these dividends and long-term capital gains will be taxed at regular tax rates instead of the lower capital gains rates. If you have qualified dividends or net capital gains, TurboTax will ask you whether you want to use some or all of this income to calculate your investment interest deduction.

What paperwork do I need for the investment interest expense deduction?

Keep the following for your records:

 - 1099-INT forms you receive from banks and lenders

 - 1099-DIV forms and Form 1099-B (Proceeds from Broker and Barter Exchange) from mutual funds and securities firms

 - Schedules K-1 from partnerships (Form 1065) and Schedules K-1 from S corporations (Form 1120S)

In TurboTax, for mechanical reasons and purposes, you'll want to enter all of your investment interest income and stock sales first.  For example, make sure you enter your 1099-INT and 1099-B, before you attempt to take the margin interest deduction.  After you've done that, then, in TurboTax Premier classic desktop (the instructions for other versions of TurboTax may differ slightly from this), you'll go to the following pathway to make your margin loan and other investments expenses entry:

1) Find the FEDERAL TAXES tab on your screen, and click the tab.

2) Find the DEDUCTIONS & CREDITS button below that.  Click it.

3) Navigate to the EXPLORE ON MY OWN / I'LL ENTER IT MYSELF option (this may require you to click through one or two other screens beforehand).

4) You should now see a screen labeled YOUR 20XX DEDUCTIONS & CREDITS.

5) Scroll down your screen, and you should see a sub-group labeled RETIREMENT & INVESTMENTS

6) You will want to click the START or UPDATE button on the third line down in that sub-group, which is INVESTMENT INTEREST EXPENSES

7) Follow the TurboTax interview prompts from there to enter your margin interest and your other investment expenses

😎 When you're done with this, the TurboTax program should have filled out Form 4952 (if applicable) and will cause your investment margin interest to appear on Form 1040, Schedule A, Line 14 . . . which is right where it should be

9) Finally, please keep in mind, however, that only if you as a taxpayer have enough itemized deductions in total, including investment expenses, to exceed the standard deduction for your filing status, will you see any actual tax benefit on your return.  In other words, if the standard deduction is higher than your itemized deductions, as is generally true for approximately 3 in 4 taxpayers, then the margin interest paid will not, as a practical matter, affect your tax return in any way.  However, TurboTax will do all of the necessary math for you, and will make the deduction decision that is most optimal for you.

Thanks for asking this important question, and good luck to you!

Regards