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Author: SandyPrice Three stars, 500 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121572  
Subject: Dividend tax and margin accounts Date: 6/10/2003 8:49 PM
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I proposed buying stock on margin that pays a dividend (e.g. MO). The stock pays a higher dividend percentage than the brokerage firm is currently charging in margin interest.

1. I understand I would need to hold MO for some time (60 days?) to have the lower tax rate on the dividends.
2. The margin interest is deductable (essentially at the normal rate I pay). Would the fact that I have this deduction raise the tax rate on the dividend? Someone said it would. During the times that I am paying margin interest, I expect that I will own other stocks (i.e., all my dividend paying stocks together will never be more than my account value).

Any comments and anything else I'm overlooking?

Thanks.
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Author: ValueMonger Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65776 of 121572
Subject: Re: Dividend tax and margin accounts Date: 6/10/2003 10:02 PM
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"Any comments and anything else I'm overlooking?"

Perhaps this. To deduct margin interest, you must have investment income equal or greater than the margin interest.

Under the previous rules (and current, I am sure!), to count long-term capital gains as investment income to qualify for taking the margin deduction, you had to count the qualifying long-term capital gains as regular income. For example if you had $2,000 in long-term capital gains as your only investment income and $1,000 margin interest, you would have to count $1,000 of your long-term capital gains as regular income.

I don't know if that would be the rule for the new dividend rates, but I would expect that it would. Such details probably won't be the actual tax legistlation, but in the agency's (IRS) implementation, i.e. the appropriate IRS publication. Should the IRS miss this for this year's publication, then I expect that they will get it next year.


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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65780 of 121572
Subject: Re: Dividend tax and margin accounts Date: 6/11/2003 5:11 AM
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I proposed buying stock on margin that pays a dividend (e.g. MO). The stock pays a higher dividend percentage than the brokerage firm is currently charging in margin interest.

1. I understand I would need to hold MO for some time (60 days?) to have the lower tax rate on the dividends.
2. The margin interest is deductable (essentially at the normal rate I pay). Would the fact that I have this deduction raise the tax rate on the dividend? Someone said it would. During the times that I am paying margin interest, I expect that I will own other stocks (i.e., all my dividend paying stocks together will never be more than my account value).

Any comments and anything else I'm overlooking?


It won't work unless you have interest paying investments. Qualifying dividends (those that are taxable at 5%/15%) no longer count as investment income for the purposes of determining how much investment interest expense is deductible (Form 4952). Qualifying dividends will be treated as long-term capital gains were under the old tax law -- you can use them to qualify investment interest expense deductions only if you agree to have them taxed at your ordinary tax rate.

Ira


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Author: SandyPrice Three stars, 500 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65786 of 121572
Subject: Re: Dividend tax and margin accounts Date: 6/12/2003 1:04 AM
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Ira,

Short term capital gains will work too, won't they? Unless the market turns around and heads south, I've got enough of those to offset the margin costs and then some.



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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65787 of 121572
Subject: Re: Dividend tax and margin accounts Date: 6/12/2003 7:06 AM
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Short term capital gains will work too, won't they? Unless the market turns around and heads south, I've got enough of those to offset the margin costs and then some.

Sort of. It depends on whether you have any long term capital losses or any capital loss carryforwards from earlier years.

The old procedure (I don't know if this will change) was to start with your net capital gain -- regardless of holding period. Then you subtract the excess of long-term capital gains over short-term capital losses. Whatever is left over counts as investment income. You then have the option of electing to treat some/all of your income that would qualify for reduced (LTCG) tax rates as ordinary income in order to increase the amount of deductible investment interest expense.

See the instructions to Form 4952 for more information. The 2002 version of this form can be found here: www.irs.gov/pub/irs-pdf/f4952.pdf

Ira


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