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I have a stock trading margin account. So, I have dividend…

I have a stock...

I have a stock trading margin account. So, I have dividend income of $12,000 and margin interest expense of $10,000. Is the $10,000 deductible?

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Is margin interest expense from a loan from a brokerage firm deductible?

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12/16/2017
Chad EA, CDFA®, CFP®
Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional
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Yes, margin interest expense is deductible as an investment related expense.

___

This information is covered in IRS Publication 550

https://www.irs.gov/publications/p550

Continued...

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The amount that can be deducted in a given year is capped at your net taxable investment income for the year. Any leftover interest expense gets carried forward to the next year and potentially can be used to reduce taxes in the future.

To calculate your deductible investment interest expense, you need to know the following:

  • Your total investment income for investments taxed at your ordinary income rate. This normally includes ordinary dividends and interest income, but does not include investment income taxed at the lower capital gains tax rates, like qualified dividends or municipal bond interest which is not taxed.
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If the interest expenses are more than the net investment income, you can deduct the expenses up the net investment income amount. The rest of the expenses are carried forward to next year.

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Here is a helpful link from Schwab that list the other investment expenses that you may be able to deduct along with how to precisely calculate your deductible investment interest expense.

https://www.schwab.com/resource-center/insights/content/investment-expenses-whats-tax-deductible

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Customer reply replied 8 months ago
Three different tax preparers from H &R Block since 2008, each filled out Form 4952 showing dividends and the margin interest but always entered the the full dividend income on the 1040 but I never did I benefitted from the margin interest. What thoughts do you have?
Customer reply replied 8 months ago
Please type answer

That may have been due to being disallowed under the AMT

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Either way, the expenses should be carried forward

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Customer reply replied 8 months ago
How far back can I go to add up margin interest? Can I have all of these tax returns add-ons going back to 2008,
Customer reply replied 8 months ago
Can I have the tax returns re-done?

I apologize, when you opt out I wasn't able to respond.

One moment please

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"Use Form 4952 to figure the amount of investment interest expense you can deduct for 2017 and the amount you can carry forward to future years."

The excerpt above is directly from IRS.Gov

https://www.irs.gov/pub/irs-pdf/f4952.pdf

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Interest not deducted due to limit.

In the year you dispose of the obligation, or, if you choose, in another year in which you have net interest income from the obligation, you can deduct any interest expense you were not allowed to deduct for an earlier year because of the limit.

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These calculations are done on schedule D of the 1040.

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Customer reply replied 8 months ago
I have had a margin account since 2008 always with margin interest and dividends. Form 4952 was always filled out but the full amount of dividends was always on the 1040. I believe I had asked the tax preparer, H&R Block about the deductability of the interest and was told it was not. I still have all of the tax returns. The 2016 tax returns were only done TODAY. Certainly, I will not mail this now. I have believe that this preparer and others just copied the prior mistakes. Would you recommend having all of the tax returns prepared again? Will they? Can I go back this far anyway? Or would you just add up all the margin of interest and use it in the future? From 2008-2015, I probably have $80,000 of carry forward interest that would take several years to use.
PDtax
PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 5,120
Experience: 35 years tax experience, including four years at a Big 4 firm.
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I see you have asked for a new professional. I'm PDtax. I'll assist.

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Investment interest is deductible, and the first reason I can think of to support your question is that maybe you did not itemize in prior years. Investment interest is an itemized deduction.

Or, perhaps your investment income was tax exempt. Your investment interest would not be deductible against tax exempt income.

Recent returns can be amended, state ones too, to claim missed deductions. There may be a way to preserve prior year missed deductions, but I would have to research that one.

Thanks for asking at just answer. Follow up questions are welcome as soon as I get my first coffee. If this covers everything, positive feedback is appreciated. I'm PDtax.

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One other thing: qualified dividends can qualify as investment income, but do not automatically. Perhaps that is the issue.

PDtax

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Customer reply replied 8 months ago
I did itemize in prior years. As I mentioned I have had H & R Block as a tax preparer since 2008, all of which had dividends and margin interest. The portfolio was S & P 500 / Nasdaq publicly traded stocks. Although Form 4952 was filled out, no amount of margin interest was deducted and all of the dividend income was shown on the 1040.I know I asked H & R Block about the the deductability and was told that it is not. I now believe that each subsequent tax preparer continued the mistake of the last. To me, this is no longer a question of the tax code,but what should I do now to correct the mistake? I still have my returns from 2008 when the margin started. I just had my taxes for 2016 done yesterday with the same error that I obviously will not mail. Can I have my taxes redone back to 2008? How far back can I have them redone? What other advice might you have?

Since you did not elect to treat prior year qualified dividend income as qualifying for investment interest matching/deduction, your investment interest expenses carry forward.

The election is made on line 4g of 4952 for any current year.

You could amend the open years, likely the last three, to claim the deductions. Since you have a growing investment interest carryforward, it is likely that would be a good use of some of your carryforward.

I can't comment on what you may have been told about the deduction, but a review of the 4952 form (https://www.irs.gov/pub/irs-pdf/f4952.pdf) should support the election and how to make it.

To summarize, consider amendment of the open years, revise the 2016 return you have and did not file, and provide your next tax pro with your records for assembly of your (adjusted) investment interest carryforward.

Thanks again for asking at Just Answer. Positive feedback (five stars) and a bonus if warranted will be appreciated. I'm PDtax.

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Customer reply replied 8 months ago
Are you still there?

yes, still here. how can I help?

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Customer reply replied 8 months ago
I just made a table back to 2008 with all years having both margin interest always greater than dividends but with a narrowing spread. Again, how far back do you think that I can amend tax returns? (I know you did say "likely the last three"). I would rather than go back than forward. If going back three years, I will leave it at that. Please give me a last word and I will give you five stars!
Only the open years, which are those filed after 12/16/13, can be amended. Your unfiled 2016 can be revised.Thanks again.PDtax
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Sorry, the date is 12/16/14.
PDtax
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