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I assume that margin interest is simply a tax deductable expense like any other deduction, and it is never more complicated than that. True? How about for someone using the standard deduction? If margin interest is not high enough to make it worthwhile to itemize, then that person just loses the chance to deduct it - true?
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Barring anything unusual, investment interest expense (IIE) is deductible, but only to the extent that your investment income (the sum of STCG, LTCG, interest & dividend income) is positive; e.g. your investment income is $5,000 & your IIE is $8,000; then $5,000 is deductible & $3,000 would be carried forward.

IIE is a Schedule A deduction, line 13 & usually requires the completion of Form 4952.

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" investment income... (the sum of STCG, LTCG, interest & dividend income)"

NOT Correct: LTCG is NOT included unless you elect to treat the LTCG as a STCG (dumb).

Joe Varga
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There are situations where IT IS smart to elect to recharacterize the LTCG as ST to recover the IIE in the current year, e.g. STCG is negative, LTCG is positive, little or no div's & int & large IIE.
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[[I assume that margin interest is simply a tax deductable expense like any other
deduction, and it is never more complicated than that. True? ]]

A bad assumption. A very bad assumption. And potentially very costly. You can read more about investment interest expenses (margin interest is a component of investment interest) in the Taxes FAQ area...and also in TMF Investment Tax Guide.

[[How about for
someone using the standard deduction? If margin interest is not high enough to
make it worthwhile to itemize, then that person just loses the chance to deduct it
- true?]]

Yup...if you claim the standard deduction, you will not receive the benefit of the investmetn interest deduction. But you MAY be able to carry that deduction over to future years if you don't itemize. You can read more about this in IRS Publication 550 and Form 4952 and the instructions.

TMF Taxes
Roy

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[[Barring anything unusual, investment interest expense (IIE) is deductible, but only
to the extent that your investment income (the sum of STCG, LTCG, interest &
dividend income) is positive; e.g. your investment income is $5,000 & your IIE
is $8,000; then $5,000 is deductible & $3,000 would be carried forward.]]

Please remember, Badger, that LONG term capital gains are NOT a part of net investment income for investmet interest purposes. Long term capital gains MUST be elected to be treated as part of net investment income. And if you make that election, you lose the preferred tax treatment on the long term capital gain.

So you have to be careful when you are dealing with LONG TERM capital gains and net investment income for investment interest purposes.

TMF Taxes
Roy
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[[NOT Correct: LTCG is NOT included unless you elect to treat the LTCG as a
STCG (dumb).]]

Right, Joe.

I know that we have BOTH corrected the Badger on this issue 2 or 3 times in the past. I e-mailed my last correction to him in case he didn't see our prior posts.

Thanks for the help, Joe...
TMF Taxes
Roy
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[[There are situations where IT IS smart to elect to recharacterize the LTCG as
ST to recover the IIE in the current year, e.g. STCG is negative, LTCG is
positive, little or no div's & int & large IIE.]]

I don't think that anybody is arguing that point. It's just that in your post you indicated that long term capital gains were automatically included in net investment income. That is simply misleading. We were simply trying to point out that the rules get a bit more complicated when dealing with long term capital gains. That's all.

TMF Taxes
Roy
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Roy:

I know, but but I guess Badger has a point though, it seems that if you have LTCG and STCL, then it may be worth while to recharacterize the LTCG as STCL to the extent of the STCL, because it will get wiped out by the STCL anyway, and by recharacterizing, a greater amount margin interest could be deducted.

On the other hand, my reasoning is that as long as you can carry it over, you'll get it all eventually because I just think that most people have int/div from something.

Joe Varga
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[[ I know, but but I guess Badger has a point though, it seems that if you have
LTCG and STCL, then it may be worth while to recharacterize the LTCG as
STCL to the extent of the STCL, because it will get wiped out by the STCL
anyway, and by recharacterizing, a greater amount margin interest could be
deducted. ]]

Absolutely correct. It is a very good point. And, in virtually all cases, it really makes sense to make the appropriate election. But I just wanted to point out, as I'm sure that you did, that LTCGs are not AUTOMATICALLY considered a part of net investment income. You've gotta do some computations to see if it is worth the election.

[[ On the other hand, my reasoning is that as long as you can carry it over, you'll
get it all eventually because I just think that most people have int/div from
something.]]

Correct again, Joe...all you are losing is the time value of money...certainly not the deduction per se. But by making the election, many times you can have the best of both worlds. It's really an interesting issue, and one that takes some thought.

TMF Taxes
Roy
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