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    Do I Need to Fill Out Form 4952?

    Form 4952 can help investors deduct investment interest expenses, lowering their tax bills.

    Selena Maranjian

    Selena Maranjian
    ( TMFSelena )

    Jul 28, 2015 at 9:58AM


    Form 4952 can help you lower your tax bill. Photo: Brad Hagen , Flickr

    If you’re an investor with interest expenses, rejoice — you may be able to deduct them from your income, using IRS Form 4952 — Investment Interest Expense Deduction.

    In a nutshell, Form 4952 helps you determine for yourself — and the IRS — how much investment interest you can deduct on line 14 of Form 1040’s Schedule A, as well as whether any can be carried forward onto a future tax return’s itemized deductions. (You can only use the form and take the deduction if you’re itemizing deductions.)

    The reason you might have some sum to carry forward is because the amount you can deduct in a given year is limited to your net investment income for that year. Thus, if you have $2,000 in investment interest expense, and just $1,200 in qualifying investment income, you can only deduct $1,200 of interest, and will have to carry forward the remaining $800 into the next tax year’s return.

    Coming to terms
    It will help to understand how Form 4952 works by reviewing some of the key terms related to it.

    Investment interest: Investment interest is what you pay, or accrue, if you borrow money for investment purposes. Margin interest is a perfect example of this. When you invest with margin (or “on margin”), you essentially borrow money from your brokerage that you use for investments. Thus, you might have $100,000 of assets (stocks, funds, and cash, perhaps) in a brokerage account, and borrow $10,000 on margin with which to buy more stocks, funds, etc. For the privilege of borrowing that money, your brokerage will charge you interest — investment interest.

    Note that, even though you might think of your home as an investment, home mortgage interest is not considered investment interest, and is not deductible via Form 4952. (It is deductible, though, elsewhere on your tax return.) Form 4952 is also not appropriate if you borrow money for a business or for personal use. If you borrow a sum that you use for several purposes — say, investments and personal use — you can include the used-for-investment portion on Form 4952. Finally, investment interest tied to the purchase of tax-exempt investments, such as municipal bonds, or tied to the production of tax-exempt income, is not deductible.  Obviously, credit card interest paid is also not deductible.

    Photo:  Got Credit

    Net investment income: Investment income can come from interest you earn, dividends, annuities, royalties, capital gains — and it typically cannot come from the operation of a profession or business or rental income from residential property. Two investment income items — qualified dividends and long-term capital gains from the sale of investment property — are generally excluded from your investment income calculations. You can choose to include them, but doing so might result in their no longer qualifying for lower tax rates, and being taxed at ordinary income tax rates. (Most people pay just a 15% tax rate on qualified dividends and long-term capital gains.) Consulting a tax pro here, or running the numbers both ways in tax-prep software such as TurboTax, is a good idea, to see which option is advantageous.

    Note that the term is net investment income. That means the sum in question is what you have after you take your investment income and subtract your investment expenses.

    Investment expense: Beyond interest, there are often other expenses related to your investments. These can include fees you pay to your tax preparer and investment advisors, fees paid to lawyers and accountants, the cost of a safety deposit box, and research materials such as financial magazines and newspapers. Even the depreciation of an asset used to produce investment income — such as your computer — can count.

    What to do
    Knowing about Form 4952 can help you prepare for tax season, as you’ll know that you need to keep track of your investment interest expense, investment income, and investment expenses throughout the year. Even though Form 4952 looks quite straightforward, there are still a lot of rules and restrictions related to it. Be prepared to read the instructions closely, or enlist the services of a tax pro. It might seem costly to do so, but a good tax pro can often save you more than he or she costs — and the expense can be deductible!


    Longtime Fool specialist  Selena Maranjian , whom you can follow on Twitter , has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .


    Author

    Selena Maranjian

    Selena Maranjian
    ( TMFSelena )

    Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool’s syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter… Follow @SelenaMaranjian


    Article Info

    • Jul 28, 2015 at 9:58AM


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    Category: Deductions

    Investment Interest Expense Deduction (Form 4952)

    Form 4952 is used to determine the amount of investment interest expense you can deduct for the current year and the amount you can carry forward to future years.

    Your investment interest expense deduction is limited to your net investment income. If you borrow money to purchase property you hold for investment, the interest paid is investment interest. However, if you borrow money for business or personal use as well as for investment, you must allocate the debt among those instances. Only the interest expense on the part of the debt used for investment purposes can be treated as investment interest. The amount of investment interest that you cannot deduct this year can generally be carried forward to be deducted on next year’s tax return.

     

    Investment Property Investment property includes property that produces income from interest, dividends, annuities, or royalties. For it to qualify as investment property, this income should not be income that is derived in the ordinary course of a trade or business. It also includes property that produces gain or loss from the sale or trade of property producing these types of income. Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity).

     

    The IRS does not allow taxpayers to deduct investment interest incurred to produce tax-exempt income. You are also unable to deduct interest on money you borrow to buy tax-exempt securities or shares in a mutual fund or other regulated investment companies that distributes only exempt-interest dividends.

     

    Additional Interest That CANNOT Be Deducted on Form 4952

    * Home mortgage interest

    * Any interest expense that is capitalized, such as construction interest subject to Section 263A.

    * Interest expense related to tax-exempt interest income under section 265.

    * Interest expense, disallowed under section 264, on indebtedness with respect to life insurance, endowment, or annuity contracts issued after June 8, 1997, even if the proceeds were used to purchase any property held for investment.

    * Interest expense that is properly allocable to a passive activity. Generally, a passive activity is any trade or business activity in which you do not materially participate and any rental activity.

     

    To locate Form 4952 within your TaxSlayer account, from the ‘My Account’ screen after signing in, click on:

    1. Federal Refund

    2. Deductions  

    3. Enter Myself

    4. Itemized Deductions

    5. Less Common Deductions

    6. Investment Interest

     

    For additional information pertaining to Investment Interest Expense Deduction, please see IRS Publication 550 .

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