Explaining the "Make a Capital Gain Election" Option

[ChicagoJ]

Hello!  For the past couple of years, I've had approximately $10,000 in investment interest expense (from buying stocks on margin) each year.  I never "did anything with this," and each year it carried over. This year I have an additional $11,000.

In TurboTax, it is asking me if I want to "Make a Capital Gain Election" -- "Your return shows qualified dividends or capital gains income of $7,000.  You may increase your investment interest deduction by electing to treat as much as $7,000 of your capital gain income as investment income. "

Could someone explain this to me?  It seems advantageous to take advantage of this -- when I plug in $7000 for Capital Gains election amount, my refund increases by a little over $1,200.  But I want to understand what is going on here.  Could someone dumb this down for me (LOL)?  I really appreciate it!  Thanks!

[ThomasM125]

You can elect to treat your capital gain and qualified dividends as investment income, which means they will be taxed at your normal federal income tax rates, as opposed to the usually more favorable capital gains tax rate. If you do this, however, you can then deduct your investment interest expense against the elected investment income. This will reduce your  income so it may reduce your income tax, as it appears it has in your case.

[ChicagoJ]

Thanks so much -- that makes sense.

It has worked in my favor this year.  Is there a maximum "per year" when it comes to the amount of Margin Interest that can be applied?  I've been "saving it up" for several years now.  I assume that there will still be carry-forward, right?  Thanks again!

[JulieS]

The deduction for investment interest is limited to the amount of your investment income in that tax year. There is a carryover of disallowed investment interest, but it is still subject to the investment income limitation. 

[Edited 04/14/22 | 3:56 PST}

[fanfare]

@JulieS @ChicagoJ 

Just not true.

see Form 4952 Part III.

The Form will be seen attached to your tax return if you print it.