Is investment interest deductible in year it's charged or year it's paid?

[user314]

I invested the proceeds of a promissory note and now intend to deduct the interest expense as investment interest.  I accrued interest for a few months in 2019 but I didn't start paying any of it until 2020.  Is the interest tax deductible when it is accrued or when it is paid?  Thank you.

[Anonymous_]

If you are using the cash method of accounting, you deduct expenses in the tax year in which they are paid.

See https://www.irs.gov/publications/p538#en_US_201809_publink1000270638

[Opus 17]

Investment interest is complicated.  

First, you must report it in the year you paid the interest.  So if you didn't pay in 2019, you have nothing to deduct.

Then, you can only deduct interest up to the amount of investment income.  For example, if you borrowed $10,000 to buy stocks, and paid $500 interest but only received $200 of dividends, you can only deduct $200.  The remaining interest can be carried forward until you have taxable income to declare.   The carry over is tracked on form 4952.

Lastly, investment interest is an itemized deduction on schedule A, so even if you have deductible interest, you might not get an actual tax benefit unless your other itemized deductions are already larger than your standard deduction.

Other investment expenses, such as account maintenance fees and research, are not deductible for tax years 2018-2025 following the 2018 tax reform law. 

[user314]

Thank you for your response.

I am a W-2 employee and pay taxes on income in the year income is paid to me (same thing with 1099's etc.).  I've also never changed Turbotax's setting regarding accounting method.  I believe that means I'm using the cash method.  Does that sound right to you?

[Anonymous_]

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@user314 wrote:

.....I've also never changed Turbotax's setting regarding accounting method.  I believe that means I'm using the cash method.  Does that sound right to you?

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Yes, you are almost certainly using the cash method.

[Opus 17]

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@user314 wrote:

Thank you for your response.

I am a W-2 employee and pay taxes on income in the year income is paid to me (same thing with 1099's etc.).  I've also never changed Turbotax's setting regarding accounting method.  I believe that means I'm using the cash method.  Does that sound right to you?

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Everyone is cash basis by default.  Going to accrual accounting requires the assistance of a real accountant, it's not for amateurs.  

[Anonymous_]

An accounting method is chosen by the taxpayer on the first return the taxpayer files. 

Almost without exception, that method is the cash method for individual taxpayers.