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Limit on Deduction
Generally, your deduction
for investment interest
expense is limited to the
amount of your net
investment income.
You can carry over the
amount of investment
interest that you could not
deduct because of this limit
to the next tax year. The
interest carried over is
treated as investment
interest paid or accrued in
that next year.
You can carry over
disallowed investment
interest to the next tax
year even if it is more than
your taxable income in the
year the interest was paid
or accrued.
Net Investment Income
Determine the amount of your
net investment income by
subtracting your investment
expenses (other than
interest expense) from your
investment income.
Investment income -
This generally includes your
gross income from property
held for investment (such as
interest, dividends,
annuities, and royalties).
Investment income does not
include Alaska Permanent
Fund dividends. It also does
not include qualified
dividends or net capital
gain unless you choose to
include them.
Choosing to include
qualified dividends.
Investment income generally
does not include qualified
dividends, discussed in
chapter 1 of IRS Publication
550. However, you can choose
to include all or part of
your qualified dividends in
investment income.
You make this choice by
completing Form 4952, line
4g, according to its
instructions.
**If you choose to
include any amount of your
qualified dividends in
investment income, you must
reduce your qualified
dividends that are eligible
for the lower capital gains
tax rates by the same
amount**.
Choosing to include net
capital gain -
Investment income generally
does not include net capital
gain from disposing of
investment property
(including capital gain
distributions from mutual
funds). However, you can
choose to include all or
part of your net capital
gain in investment income.
You make this choice by
completing Form 4952, line
4g, according to its
instructions.
**If you choose to
include any amount of your
net capital gain in
investment income, you must
reduce your net capital gain
that is eligible for the
lower capital gains tax
rates by the same amount**.
For more information about
the capital gains rates, see
Capital Gain Tax Rates in
chapter 4 of IRS Publication
550.
Before making either choice,
consider the overall effect
on your tax liability.
Compare your tax if you make
one or both of these choices
with your tax if you do not.
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Back to:
Investment Interest Expense
Index
Other sections to read about
investment interest expense:
Investment Interest Expense,
Investment
Interest General Information,
Allocation of Interest
Expense,
When to Deduct Interest
Expense,
Form 4954 Guidelines,
Investment
Income of Children,
Limits on Investment Interest
Deduction,
Investment Expenses
