Investment Interest: Understanding The Disallowance

Investment interest is one of the deductions disallowed under the AMT. The IRS specifically prohibits certain types of investment interest from qualifying, including interest used to generate tax-exempt income, such as if you go on margin to buy a municipal tax-free bond. Investment interest expense deductions can be complicated to calculate, but Form 4952, Investment Interest Expense Deduction, and Form 6251, Alternative Minimum Tax—Individuals, instruct taxpayers on how to compute the correct taxes under both systems.

Investment interest is one of the deductions disallowed under the AMT

Investment interest is deductible as an itemized deduction but is limited to net investment income. This means that only the amount of investment interest expense that exceeds the deductible amount can be carried forward to future tax years. The rules for calculating investment interest expense deductions can be complicated, and there are specific forms that taxpayers must use to compute their taxes correctly under the AMT system.

There are also other reasons why investment interest may be disallowed as a deduction. For example, the IRS specifically prohibits certain types of investment interest, such as interest used to generate tax-exempt income. Additionally, from 2018 to 2025, there was a general disallowance of miscellaneous itemized deductions subject to the 2%-of-AGI floor, which included investment expenses.

Practitioners should be aware of future developments in the tax laws regarding the disallowance of investment interest. Deciding whether to make an election may require an analysis of future tax years, including current and future marginal tax rates, expected net investment income, and the taxpayer's discount rate or factor for computing the time value of money.

Investment interest expense deductions can be carried forward to future tax years

The IRS specifically prohibits certain types of investment interest from qualifying. For example, interest used to generate tax-exempt income, such as if you go on margin to buy a municipal tax-free bond, is not allowed as a deduction.

Investment interest is deductible as an itemized deduction but is limited to net investment income. If funds from a home-equity loan are used to purchase taxable investment securities, and the taxpayer has sufficient investment income to deduct the interest as investment interest, the taxpayer should consider using the tracing rules of Temp. Regs. Sec. 1.163-8T to classify the interest as investment interest.

With the disallowance of investment expenses under Sec. 212 from 2018–2025, investment income will have few, if any, offsets in the calculation of net investment income in these years. When deciding whether to make an election, an analysis that includes a number of future tax years may be required. Key factors in making the decision are current and future (anticipated) marginal tax rates, expected net investment income (excluding net capital gains and qualified dividends) and investment interest expense for future tax years, and the taxpayer's discount rate or factor for computing his or her time value of money.

Investment interest is deductible as an itemized deduction but limited to net investment income

Investment interest is one of the deductions disallowed under the AMT. The instructions for Form 4952, "Investment Interest Expense Deduction", and Form 6251, "Alternative Minimum Tax—Individuals", instruct taxpayers on how to compute the correct taxes under both systems. The amount of investment interest expense that exceeds your deductible amount can be carried forward to future tax years.

Investment expenses are the deductions allowed (other than interest) that are directly related to the production of investment income. An expense subject to the 2%-of-adjusted-gross-income (AGI) limitation on miscellaneous itemized deductions is considered only to the extent a deduction is allowed. With the disallowance of investment expenses under Sec. 212 from 2018–2025, investment income will have few, if any, offsets in the calculation of net investment income in these years.

If funds from a home-equity loan are used to purchase taxable investment securities, and the taxpayer has sufficient investment income to deduct the interest as investment interest, the taxpayer should consider using the tracing rules of Temp. Regs. Sec. 1.163-8T to classify the interest as investment interest since the deduction for home-equity interest is suspended from 2018–2025.

Investment interest is disallowed under Sec. 212 from 2018-2025

Investment interest is one of the deductions disallowed under the AMT. The instructions for Form 4952, "Investment Interest Expense Deduction", and Form 6251, "Alternative Minimum Tax—Individuals", instruct taxpayers on how to compute the correct taxes under both systems.

Not all interest you pay on investment loans is allowed as a deduction. The IRS specifically prohibits certain types of investment interest from qualifying, including interest used to generate tax-exempt income, such as if you go on margin to buy a municipal tax-free bond.

If funds from a home-equity loan are used to purchase taxable investment securities, and the taxpayer has sufficient investment income to deduct the interest as investment interest, the taxpayer should consider using the tracing rules of Temp. Regs. Sec. 1.163-8T to classify the interest as investment interest since the deduction for home-equity interest is suspended from 2018-2025.

Interest used to generate tax-exempt income is prohibited by the IRS

Investment interest is one of the deductions disallowed under the AMT. The instructions for Form 4952, "Investment Interest Expense Deduction", and Form 6251, "Alternative Minimum Tax—Individuals", instruct taxpayers on how to compute the correct taxes under both systems. Ultimately, whichever of your Form 4952s shows the higher tax is the one you will have to file with the IRS.

Investment expenses are the deductions allowed (other than interest) that are directly related to the production of investment income. An expense subject to the 2%-of-adjusted-gross-income (AGI) limitation on miscellaneous itemized deductions is considered only to the extent a deduction is allowed. With the disallowance of investment expenses under Sec. 212 from 2018–2025, investment income will have few, if any, offsets in the calculation of net investment income in these years.

If funds from a home-equity loan are used to purchase taxable investment securities, and the taxpayer has sufficient investment income to deduct the interest as investment interest, the taxpayer should consider using the tracing rules of Temp. Regs. Sec. 1.163-8T to classify the interest as investment interest since the deduction for home-equity interest is suspended from 2018–2025.

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