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Hi,

I have used margin loan at different times during the tax year to buy stocks. Very often I sold other socks (not bought with the margin loan) soon after and thus paid back the loan. In the return (with Turbotax) I am asked to input the total interest paid.

Will this information be sufficient for claiming the interest as a deduction when using the itemized deduction option?

Thanks.
alpha
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have used margin loan at different times during the tax year to buy stocks. Very often I sold other socks (not bought with the margin loan) soon after and thus paid back the loan. In the return (with Turbotax) I am asked to input the total interest paid.

Will this information be sufficient for claiming the interest as a deduction when using the itemized deduction option?


Specifically, no. But to answer what you were really asking, yes. In addition to the total margin interest you paid during the year, you will need to input the investment income (interest and non-qualified dividends) you received during the year. This will be found on the 1099-INT and 1099-DIVs you've already input to the program. If you don't have enough investment income, you can carry the balance forward or elect to treat some of your qualified dividends or long-term capital gains as ordinary income. See Form 4952 and its instructions.

Ira
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Thanks for the reply.

I have of course completed the Return giving the interest and dividend incomes transferred from my broker's statement electronically by Turbotax. I have also the Schedule-D prepared by TT. What I was wondering is if do not have sufficient income from interest and dividend but have more than enough long term gains from my portfolio (as a whole), then will that allow me to use the margin loan interest in full for itemized deduction, no matter which shares I purchased with the margin loan.

You have mentioned that in your reply but I just wanted to make sure as in the articles I consulted before asking this question only the interest and dividend incomes were mentioned.

Thanks again.
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The articles only mention dividends and income because you can only deduct investment interest to the extent you have investment income which is taxed at ordinary rates. This is interest and non-qualified dividend income (and some less common items). However, you can choose to treat some or all of your qualified dividends and long-term capital gains as investment income by agree to let them be taxed at ordinary tax rates in lieu of the preferable long-term capital gains rates. You do this by including them on line 4g of Form 4952.

I'm not aware of any method to determine whether treating the capital gains as investment income on Form 4952 is advantageous other than actually running the numbers and seeing what your final tax liability is.

There is no tax linkage between the margin loan(s) and the specific shares purchased with the borrowed money.

Ira
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Thank you, Ira.
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Sorry to return to this topic.

I checked my Form 4952 as prepared by TT. On Line 4f it works out short term capital gain by subtracting from the amount on Line 4d (which is the same as the total gain shown on Line 16 of Sch D) the amount on Line 4e (which in my case is the same as the net long term gain shown on line 15 of Sch D).

Line 4g is blank, so not opting to include long term capital gain. But on Line 6 it calculates Net Investment Income by adding 4c and 4f (and 4g which is blank), that is, short term capital gain is treated as part of Net Investment Income, at least for the purpose of calculating "Investment interest expense deduction".

This allows a much higher value of margin loan interest to be deducted as I happen to have quite large short term capital gains.

Did TurboTax calculate the deduction correctly, by including my short term capital gain in the Net Investment Income?

I will be grateful for a confirmation.

Thanks.
alpha
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I checked my Form 4952 as prepared by TT. On Line 4f it works out short term capital gain by subtracting from the amount on Line 4d (which is the same as the total gain shown on Line 16 of Sch D) the amount on Line 4e (which in my case is the same as the net long term gain shown on line 15 of Sch D).

Line 4g is blank, so not opting to include long term capital gain. But on Line 6 it calculates Net Investment Income by adding 4c and 4f (and 4g which is blank), that is, short term capital gain is treated as part of Net Investment Income, at least for the purpose of calculating "Investment interest expense deduction".

This allows a much higher value of margin loan interest to be deducted as I happen to have quite large short term capital gains. Did TurboTax calculate the deduction correctly, by including my short term capital gain in the Net Investment Income?

I will be grateful for a confirmation. Thanks.

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Yes, in all cases short-term capital gains are investment income for purposes of the investment income deduction.

And you're evidently aware of the election to include long-term gains as well, as you indicate,
"Line 4g is blank, so not opting to include long term capital gain."
But did you try it both ways, to see which method gives you the lower tax? There's no real quick and easy method other than calculating the return both ways, with and without the election, to see which way your tax is lower.

Making the election to include some or all of your long-term capital capital gains in investment income will give you a bigger investment interest deduction. This will lower your taxable income. But the LT gains will not be taxed at a reduced rate. Which way works better depends on the rest of your numbers on your return, the exact numbers on your Schedule D, whether the larger deduction gets you to a lower bracket, etc. And the overall difference may or may not be significant, especially keeping in mind that the unused margin interest can be carried over.

Bill
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Bill, you have been most helpful. Thank you for the confirmation that TT calculated the numbers correctly.

As it happens, I had quite a large short term capital gain which was more than enough to cover the interest deduction. I think in this case there is no need to do the alternative calculations you suggest. Even if I wanted to do it (say, for a future year) where do I make this decision? TT did not ask me, unless I missed it, and used the default option.

Cheers

alpha
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As it happens, I had quite a large short term capital gain which was more than enough to cover the interest deduction. I think in this case there is no need to do the alternative calculations you suggest. Even if I wanted to do it (say, for a future year) where do I make this decision? TT did not ask me, unless I missed it, and used the default option.
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You're right. In your case, for this year, you're getting the full amount of the deduction without sacrificing the benefit of the long-term nature of the capital gains.

I don't know exactly where in the Step-by-Step method with Turbo Tax you make the election - *probably* in the interest expense area where you entered the amounts. OR you might find it easier to make the entry in the Forms view, right on the 4952 worksheet.

Bill
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I have another question on Form 4952. What do I input on Line 5? Instructions say:

"Investment expenses are your allowed deductions, other than interest
expense, directly connected with the production of investment income.
For example, depreciation or depletion allowed on assets that produce
investment income is an investment expense."

If I have only stocks and shares including an MLP (EPD - Form 1065) do I have any such Investment Expenses? If I input zero I may be overestimating Net Investment Income (Line 6) but so long it is much larger than Interest Expense (Line 3) should it not be okay?

TIA
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I have another question on Form 4952. What do I input on Line 5? Instructions say:

"Investment expenses are your allowed deductions, other than interest expense, directly connected with the production of investment income. For example, depreciation or depletion allowed on assets that produce investment income is an investment expense."

If I have only stocks and shares including an MLP (EPD - Form 1065) do I have any such Investment Expenses? If I input zero I may be overestimating Net Investment Income (Line 6) but so long it is much larger than Interest Expense (Line 3) should it not be okay?

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Zero is probably right, for a combination of reasons. That quoted section is not particularly useful. EPD is Enterprise Products Partners, a pipeline company. The income (or losses) it reports to you as a partner on your K-1 is mostly business income, subject to the (publicly traded partnership-PTP) passive loss limits, as opposed to investment income for this purpose. But you have to look at your K-1 for amounts classified as investment income and investment expenses to which Form 4952 applies.

Any other expenses you have related to your other investments are *probably* miscellaneous itemized deductions, which are not deductible for the next few years.

Bill
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I could not find any item on K-1 classified as Investment Income or Investment Expenses. So I will use zero on Line 5.

Thanks for your help.
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