Hi,I've gone through a lot of the posts concerning Margin Interest and the ability to deduct it from one's taxable income. I'm still a bit unclear about the rules governing carryovers.One post that I read stated that if you can itemize but elect not too then you lose your Margin Interest deduction carryover. Is there ever really a time when a person can't itemize? I haven't ever done so because it hasn't made any sense financially. Have I lost the ability to carryover this interest as a result of this? Turbo Tax has been automatically carrying it over for me for the last couple of years.Second question - I don't file quarterly, or at least never have in the past. I sold some stock in the second quarter for a substantial profit, however was a bit premature in diving back in. I now find myself down below even my original cost basis. If I hold on to this until December and it still hasn't come back can I sell for the loss and come out even, or would I still have to do the Safe Harbor thing to avoid an underpayment?Thanks In Advanceem
Interesting comment. §63(b) states for those who do not elect to itemize his deductions . . . would indicate that you can elect not to itemize . . . but why would you? There are those you must itemize, for purposes of married filing separate, so yes there are times when you can not itemize. See page two of your Form 1040, there is a box to check, and I think 1040C does not allow some Non resident departing aliens to itemize, or visa versa. When you don't itemize, you don't because the standard deduction is greater than the itemized deductions. Why else would you use the standard deduction? Yes, you loose the margin interest you could have used had you itemized, it gets deducted from your carryforward, but it really isn't lost because it just did not exceed the standard deduction. So, yes you lost the allocable portion that was going to this year, but not the whole carryover. But then again you really did not because the standard deduct was greater. Did you consider allocating capital gains to investment income that is detailed on the investment interest form? This is an election and I do not believe Turbo Tax will do this for you, you have to do it yourself, but often it makes no sense. Estimated taxes are done quarterly, so selling a loss in the 4th quarter might not help out in the 2nd quarter, but you have to grind the numbers. For example, do you have any withholdings that might offset the gain? The safe harbor is a quarter by quarter thing too. Get a Form 2210 a grind the numbers.
First of all, it would make sense to know how much margin interest we're talking about. The reason being, is that investment interest expenses are only deductible in excess of 2% of your adjusted gross income. Your adjusted gross income is your total income less ira contributions, alimony, moving expenses, ...and a few other things. Let's say for example you make 50G....and you said that you didn't itemize (are you married?). let's assume for this example your single, and make 50G/year. After your standard deduction of (4400 in 2000), and personal exemption (2800 in 2000)...assuming you do not contribute to a regular IRA...or have any other "above the line deduction" you are left with 42,800 of taxable income. Since you are not "itemizing" you will have to carry over that investment interest expense from year to year until you have miscellaneous expenses that are greater than 2% of your adjusted gross income. Now, for the sake of argument, let's say that you were going to itemize in the year 2000. For example, let's say you bought a house or something...and the mortgage interest you paid exceeded your standard deduction...now you may itemize because it is in your best interest. However, like i said before investment interest is a miscellaneous itemized deduction. This means that is is subject to a 2% floor, which means it is only deductible if it exceeds 2% of your adjusted gross income. If your itemized deduction for 2000 were slightly larger than your standard deduction (let's say 5000)...and you still get your personal exemption of 2800 that leaves you with 42,200 of taxable income. Now, 2% of that (assuming that you have no other "above the line deductions") is 844. Do your investment expenses exceed 844? let's say that they were 1000. you get to deduct the difference of 166...which is a whopping tax savings of roughly 40 bucks! is it worth it???? I would say yes, but it would only take me 5 minutes to do this...an ordinary non-tax professional it would take days and they would still probably get it wrong. It doesn't sound like you have an accountant, but if you do choose tou get one ask them about making a section 266 election. This allows you to capitalize investment carrying charges to sales...which means that you can directly offset some of your taxable gain with some of those investment fees. It's a little trouble for a person with no experience, however, if these fees start to run in the thousands, i've saved clients hundreds if not thousands of dollars. Hope you took the time to read my lengthy reply. Hopefully it made a little bit of sense...taxes are pretty complicated, and it really is best to have a tax professional help you out...saves you time and it really does save a person money as well. Good Luck! I'd print this and save it for future reference.
DONEby40 writes (in part):This means that is is subject to a 2% floor, which means it is only deductible if it exceeds 2% of your adjusted gross income. If your itemized deduction for 2000 were slightly larger than your standard deduction (let's say 5000)...and you still get your personal exemption of 2800 that leaves you with 42,200 of taxable income. Now, 2% of that (assuming that you have no other "above the line deductions") is 844.I reply:The 2% floor for miscellaneous deductible expenses is based on AGI, not taxable income. Therefore, it's incorrect to subtract itemized deductions before computing the floor; these, like the personal exemption, are "below the line," not "above the line." If your AGI is $50,000, your first $1000 in miscellaneous deductions is not deductible from your income. --Bob
Investment interest is NOT subject to the 2% floor for miscellaneous deductions. Investment interest is deductable as an itemized deduction but only to the extent of investment income. IRS code 163, also see form 4952.Investment fees paid to investment advisors and brokerage fees that are based on a percent of account value are subject to the 2% floor for all itemized deductions in total.Good luckEG
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