Investment interest, the interest on debt used to buy assets held for investment, such as margin debt used to buy securities, can generally be deducted for both regular tax and alternative minimum tax purposes.
But because of applicable rules, taking these deductions isn’t always the smartest decision.
There are limits.
You can’t deduct interest you incurred to produce tax-exempt income. For example, if you borrowed money to invest in federally tax exempt municipal bonds, the interest could not be deducted.
Long-term capital gains and qualified dividends aren’t included. Investment interest deduction is limited to your net investment income, which, in this case, would include taxable interest, nonqualified dividends and net short-term capital gains, reduced by other investment expenses. You can then deduct any carried forward disallowed interest in a later year if you have excess net investment income.
Disallowed interest is carried forward so you are able to deduct disallowed interest in later years when you have excessive net investment income.
Different tax treatments let you deduct more.
Another option would be to elect to treat net long-term capital gains or qualified dividends as investment income and deduct more of your investment interest. That portion of the long-term capital gain or dividend would be taxed, however, at ordinary-income rates.
Should you claim deductions on investment interest expenses, or treat gains or dividends differently?
Contact us so we can help you maximize your deduction!