I'm trying to figure out how to get a credit for the debit interest I paid for having stock on margin. I don't know if I should fill out form 4952. I had more margin interest than investment income from interest and dividends so it looks like I have to. But is margin interest considered a passive activity? There's something about form 8582. Do I need to fill that one out? When I went through form 4952, the last line said to put in the smaller amount from line 3 or 6. The amount would be 0 because I didn't have investment property. That's what makes me think I shouldn't be filling this form out. If somebody could help me I would appreciate it. I'm very confused and it seems like it shouldn't be this difficult. Thanks,
Chris

On Schedule A you can deduct margin interest up to the limit of your investment income.
If the margin interest is more than your investment income, you can carry the balance forward to future years when hopefully you will have more investment income.
If you don't expect to be making income, obviously you should not borrow on margin!
Best wishes, Chris

I appreciate the reply. What constitutes investment income? Is it only dividends and interest? My stocks don't give dividends and I don't keep much cash in my account so I have more debit interest than those types of income. Does investment income include cash made from stock sales? Basically, can I use the debit interest to reduce the taxes I have to pay on capital gains from stock sales? Does it matter if the capital gains is short term or long term(taxed at 20%)? Any help is appreciated. Thanks,
Chris

If you have net capital gains from the sale of investment property such as stocks or mutual fund shares, those gains are not treated as investment income unless you specifically elect to include them in investment income on Form 4952. If you make the election, you cannot use capital gains rates for the amount of net capital gains treated as investment income in order to increase your investment interest on Form 4952. If you make the election on Form 4952, the elected amount is subtracted from net capital gains when applying the capital gain tax rates.

You can take the investment interest deduction on line 13 of the schedule A without using the Form 4952 IF:

--All the taxpayer's investment income was from dividends and interest.

--The taxpayer had no other deductible expenses connected with the production of interest and dividends

--the taxpayer's investment interest expenses are not more than his investment income

--the taxpayer had no carryover of investment expenses.

<<What constitutes investment income? Is it only dividends and interest? My stocks don't give dividends and I don't keep much cash in my account so I have more debit interest than those types of income. Does investment income include cash made from stock sales? >>

You might want to read more about investment interest issues in my article on that very subject in the Taxes FAQ area.

Generally, investment income includes interest, dividends, net short term gains, and net elected long term gains.

If you determine that your investment expenses exceed your net investment income, you'll really want to complete Form 4952 in order compute your investment interest carryover to year 2000.

TMF Taxes
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