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scy
Level 4

can investment expenses can offset dividends

Can losses in selling mutual fund investments and interest expenses for a loan used to buy mutual funds offset dividends earned from mutual funds

3 Replies
Level 18

can investment expenses can offset dividends

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).

 

 

scy
Level 4

can investment expenses can offset dividends

Let me explain my question. I get a margin loan for a mutual fund investment and pay $9,000 interest. I earn $10,000 dividend. Essentially I had $1000 income. According to Schwab webpage this is how tax-law works.

According to your explanation I can use only $3,000 of investment expenses to reduce my income, but my income is increased by $10,000. Essentially because of this investment, I have to pay taxes for $7,000, although I had  only $1,000 income.

It is a moot point that I can carry over $6,000 of investment expenses to next year. The reason is that, if this situation happens every year, I can never use the carry over. To me this does not add up.

 

 

Highlighted
Level 20

can investment expenses can offset dividends


@scy wrote:

I get a margin loan for a mutual fund investment and pay $9,000 interest. I earn $10,000 dividend. 


To the extent the $10,000 in dividends are strictly considered ordinary dividends (not qualified) then you can use the margin interest to offset the $9,000.

 

You simply cannot offset investment interest with qualified dividends.

 

See https://www.irs.gov/pub/irs-pdf/f4952.pdf