Question

Doug and Sue Click file a joint tax return and decide to itemize their deductions. The Click's income for the year consists of $90,000 in salary, $2,000 interest income, $800 long-term capital loss. The Click's expenses for the year consist of $1,500 investment interest expense. Assuming that the Click's marginal tax rate is 35 percent, what is the amount of their investment interest expense deduction for the year?

Answer 1

The amount of interest that can be deducted in any particular year is limited to the taxpayer's net investment income for that same year. It can't exceed that amount.

Investment expenses are a miscellaneous itemized deduction on Schedule A of Form 1040. They're subject to the 2-percent rule—you can only claim the deduction for expenses that exceed 2 percent of your adjusted gross income. Enter them on line 14 of the 2017 Schedule A.

You might or might not have to include Form 4952 as well. The IRS advises in Publication 550 that it's not necessary to file Form 4952 if you meet all of the following tests:

• "Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends
• You do not have any other deductible investment expenses
• You have no carryover of investment interest expense from the previous year"

You can deduct all your investment interest if you qualify.

So in the given case net income from investment is $2000- $800= $1200. So deduction of investmet interest expense will be limited to $1200.