My margin interest paid at my broker exceeds the standard deduction. why is turbotax not letting me deduct the full margin interest paid?

[paul-j-heckman]

above pretty much explains it. i don't know why i can't itemize my full margin interest expense

my net investment income exceeds my margin interest by about 2,000 USD.

i took a net capital loss in 2022, but I have dividends & interest income.

But it just seems to me i should be able to use the full margin interest paid against the net investment income, because it the margin interest paid exceeds the standard deduction

[Mike9241]

if any part of your net investment income is qualified dividends you may make an election to treat enough of it as nonqualified to the extent needed to use all your investment interest. of course, then those dividends are not taxed as qualified.  there is no requirement to make this election. any investment interest not used becomes a carryforward.

[paul-j-heckman]

appreciate your response.

if i can ask, how does treating it as non-qualified allow me the ability to use more of the margin interest expense?  i guess i just don't understand.

also, how do i perform this reclassification on the turbotax site/platform?

thank you very much!

[JulieS]

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:

1. Select Federal Taxes toward the upper left.
2. Select Deductions and Credits just below it.  
3. Select, I'll choose what I work on, on the right.
4. Scroll down to Retirement and Investments. 
5. Click Start or Update to the right of Investment Interest Expenses.
6. Answer the first question Yes.
7. Click Continue until you get to Make a Capital Gain Election. 
8. Read the first sentence carefully. It will tell you how much you can elect to treat as investment income. 
9. 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. 

[paul-j-heckman]

thanks for your response.  really odd it's not a feature in the online version...

you note "Once you make this election by filing your return, you can't change it without IRS permission. "

what does this mean?  It's a distinction that carries forward tied to me every year going forward?  I guess I don't quite understand how it works

but I did have a net capital loss for 2022, so it may make sense to take the positive dividend gain and apply it to the loss balance...

[paul-j-heckman]

oof, and it's asking me to pay $120 for the desktop version...

this is really odd....the feature really should be available

[DoninGA]

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@paul-j-heckman wrote:

oof, and it's asking me to pay $120 for the desktop version...

this is really odd....the feature really should be available

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All of the TurboTax desktop editions include the same forms, schedules and worksheets.  So you can use the Deluxe desktop edition at $80.  The purchase price for all the desktop editions include one free state program download (except the Basic edition).

[paul-j-heckman]

okay but why would desktop even have features that online wouldn't?  Shouldn't online give me all options in filing?  that's really, really odd...

you're saying the $80 will include 1 free state return filing?

[DoninGA]

The TurboTax online and desktop editions are entirely separate programs with different options, features and pricing.

You get one free state program download with the purchase of the Deluxe desktop edition.  That does not include a free state e-filing.  There is currently a $25 e-file fee for each state tax return e-filed when using the desktop editions (except New York state which is free).  The fee can be avoided by printing and mailing the state tax return.

[paul-j-heckman]

sorry to bother you again but can you elaborate on "you note "Once you make this election by filing your return, you can't change it without IRS permission. "

thank you!

[paul-j-heckman]

Hi Julie

just a follow up:  my total dividends are 9,000 and my qualified dividends of those total are about 4,500

I have a capital loss that exceeds 10,000.  

in my case, it would make sense to elect my full 4,500 in qualified dividends as 'investment income" because it would simply be offset against my capital losses, correct?  Given that i can only use 3,000 in capital losses per year anyway?   so right now i'm already receiving 3,000 in deductions for capital losses.  If i elect the 4,500 of qualified dividends as investment income, it'll take it out of my taxable adjusted gross income, and offset it against the excessive capital losses, right?  So my net capital loss 2022 remains -3000

do i have this correct?  As opposed to getting taxed on my qualified dividends at whatever rate.  (to be clear, i have no other annual income besides dividends and capital losses/gains)

[JulieS]

Yes, based on what you have outlined here, your deductible capital loss would remain -$3000. 

In addition, your total capital loss is used to calculate your net investment income for the purpose of deducting your margin interest, so this strategy doesn't really work for you this year. 

"Once you make this election by filing your return, you can't change it without IRS permission." This applies only to the amount you elected to treat as investment income and only to this return.

For example, if you make the election to treat your $4500 as investment income when you file your return, you can't amend the return later and use the long term capital gains treatment, unless you get permission to do so from the IRS.