How do I designate a portion of qualified dividend income as ordinary income?

[joshjj7727]

Form 4952 (line 4g) allows this, but I can't figure out how to do it in TurboTax.  I want to do it to increase my investment income so that I can offset investment interest that I would not otherwise be able to deduct.

[TurtleAnna · Accepted solution]

Please go to the "deductions & credits" tab, then select "investment interest expenses" under the "retirement and investments" section.  You enter your investment interest here.  If it is limited because you don't have enough investment income in your return that is already taxed at ordinary income rates, and you have either qualified dividends or long-term capital gains, you'll then see a screen in this section (3 or 4 screens after entering your investment interest expense) that is titled "make a capital gain election."  This is where you indicate how much of your qualified dividends or long-term capital gain income you'd like to elect to be taxed as investment income at ordinary income tax rates.  Hope this helps.

[joshjj7727]

I've already done this, and tried it again.  At no point does TurboTax ask me if I want to make a capital gain election.

[joshjj7727]

After trying other ways to address this, I eventually called the TurboTax help line.  After a long time on hold, they put me in touch with a CPA, who then spent about another hour trying to fix the issue.  His final answer:  it is impossible to do this in the online version.  Instead, he instructed me to download the desktop version, where the problem is easy to address.  (There may be many ways to address it in the desktop version, but the method I used was just to edit form 4952 directly).  Boo to TurboTax for having this flaw in the first place and for failing to acknowledge it in the answer to this question; but thumbs up to the CPA who worked so hard to solve the problem!

[alexgerber]

I found a bug in their software. When the investment expense is less than line 4a, it doesn't offer the optional screen ""make a capital gain election."

This obviously doesn't make sense...

[hbhiii]

that is right - I agree that you have to enter onto the form

[G14058Tax]

I had the similar issue that I have huge Foreign Earned Tax Credit, but can't seem to get rid of $10 NIIT tax, due to my Qualified Dividend income.  I tired add portion of dividends to form 4952 , but it did not remove NIIT tax.  So I reduce 1099-DIV  by $400, and made the adjustment for $400, then add the $400 to Interest on 1099-DIV (same as bank interests), Bingo, $10 NIIT Tax is gone!  I agree, TurboTax is only look at to Maximize tax, but not smart enough to handle my situation (with huge Tax credit).

Thanks for your original post that led to solution to solve my problem.   

[questionhelpme]

I also want to have my qualified dividends offset my investment interest expenses for the 2022 year.  Any updates to the Turbo Tax online?  I have been using the online version for many years and don't want to switch to the desktop version.  The "make a capital gain election" screen does not show up after entering in the investment interest expenses section.  

[GeorgeM777]

While ordinary dividends are taxed at ordinary income tax rates, they still remain dividend income.  It's not clear what you mean by designating a portion of your qualified dividends as ordinary income.  If you can provide additional information about this issue, that may help us better understand your tax situation. 

Investment interest expense can be deducted; however, it is an itemized expense and therefore, must be entered on Schedule A. While it is deductible, that deduction is limited to your net investment income.  

You can carry over the amount of investment interest you could not deduct because of this limit to the next tax year. The interest carried over is treated as investment interest paid or accrued in that next year. You can carry over disallowed investment interest to the next tax year even if it is more than your taxable income in the year the interest was paid or accrued. 

@questionhelpme

[questionhelpme]

@GeorgeM777

Appreciate the quick response.  I understand that f I had qualified dividends, I can elect to have them be ordinary instead so that I can use them to offset the investment interest expenses as an itemized expense.  

Investment interest expenses are from a loan taken out to purchase company stock.  Qualified dividends are from the stocks purchased.  

Not sure how this would be done with the turbotax online version.  Would I enter the qualified dividends that I want to designate in the "Net investment income" section?

Below is the source of what I want to accomplish.  Thank you.

Qualified dividends

Qualified dividends that receive preferential tax treatment aren't considered investment income for purposes of the investment interest expense deduction. However, you can opt to have your qualified dividends treated as ordinary income.

In the right circumstances, electing to treat qualified dividends as ordinary dividends can increase your investment interest expense deduction, which could allow you to pay 0% tax on the dividends instead of the 15% or 20% tax that qualified dividends normally receive.

https://www.schwab.com/learn/story/investment-expenses-whats-tax-deductible#:~:text=Qualified%20divi....

[DaveF1006]

Since you have the option to elect to report your qualified dividends as ordinary dividends, you can report the entire dividend distribution as ordinary dividends.  In your TT return, remove the amount of qualified dividends reported in Box 1b of the 1099-DIV and add to the total of Box1a.

[questionhelpme]

@DaveF1006 Thanks.  It seems to work by just removing Box1b of the 1099-DIV.  Is it fine to just remove it this way?  

[DaveF1006]

Yes, this is perfectly acceptable to remove it this way.

@questionhelpme 

[fredcassy]

I  erased my qualified dividends from box 1b and left the amount in box1a but I still was not able to offset it with my margin. As a matter of fact my Federal taxes go up.

[AllenZz]

I am stuck on same situation. But after reading the thread, it seems indicating while making this election, you would opt for having that part of income to get taxed higher rate in order to be able to offset it with margin interest cost.  Doesn't seem optimal to me. 

And since the SALT 10K limit, I had to opt for standard deduction which seems whatever 4952 line 8 comes out of, I won't be able to take advantages. So gonna just keep it around until later when I have some short-term income or itemize > standard. My 2 cents and let me know if I got it wrong.