Investment margin interest deduction

I went to H&R Block to file my tax return.

My investment (short term) income was higher than the interest I payed to Ameritrade broikerage for margin interest. I expected that margin interest (used only to finance short term stock trades) can be deducted from my investment income. However, H&R Block accountant (?!) told me that, since my margin interest payment is lower than $5,000 deductible allowed by the Government, nothing would be accomplished (i.e. I won't pay less taxes) by deducting it. In short, if my short term trades investment income was $2,000 and margin interest was $1,000, according to H&R Block person, I have to report $2,000 as investment income and I can simply forget about $1,000 margin interest payed to the brokerage on that income (it can't be deducted) However, everything I read on the Web appears to contradict this. Now I am completely confused and seeking explanations and help on this issue. Why are broker's comissioins deductible but margin interest is not? Thanks for any clarification, Tony

> > > > > > >
Reply to
Tony
Loading thread data ...

You had a false expectation. The fact that you had sufficient investment income means that your investment interest is *deductible*, but it's not deductible directly against investment income. It's an itemized deduction on Schedule A.

I suspect a little miscommunication here. The 2005 standard deduction for a Single filer is $5,000. If your investment interest plus other Schedule A items isn't at least $5,000, there's no tax benefit to the interest.

Because Congress is the mommy, and Congress says so.

-- Phil Marti Clarksburg, MD

Reply to
Phil Marti

That sounds correct. You get the "standard deduction" just for being alive. If your total actual itemized deductions (state&local income tax, property tax, charity, mortgage interest, allowable investment interest, etc.) is less than the standard deduction, there's no point in taking the actual deduction since you'll get a better tax result by taking the standard deduction. And, as stated, the investment interest deduction is a Schedule A itemized deduction. The only way to take it is to itemize. But if itemized deductions are less than the standard deduction, itemizing makes you pay more taxes.

So the odds are that the Block guy is correct.

That's correct if you don't itemize.

Then you've misunderstood what you've read.

See above.

(1) Brokerage commissions aren't "deductible" per se. They are considered part of the cost of buying and selling securities and so become part of basis, directly affecting the computed capital gain or loss. (2) That's how Congress wrote the law.

-- Rich Carreiro snipped-for-privacy@animato.arlington.ma.us

Reply to
Rich Carreiro

Broker's commissions directly reduce the gain you make on a specific trade. When you report that gain on Schedule D, you report the net gain including the effect of the commissions. Margin Interest is an itemized deduction, reported on Schedule A. Other itemized deductions are things like state income tax, property tax, mortgage interest, and charitable contributions. When you compute your taxes you sum up all these itemized deductions and subtract them from your (adjusted) gross income. OR instead of subtracting these itemized deductions you can subtract a "standard" deduction, which happens to be $5,000 for a single person. If your total itemized deductions are less than your standard deduction, you come out ahead by using the standard deduction. Sounds like that is what happened to you.

-- Don EA in Upstate NY

Reply to
Don Priebe

Do you itemize your deductions on Schedule A? Do they (including the margin interest) exceed $5,000? If not, then you use the Standard Deduction of $5,000 and get no additional tax benefit from the margin interest. One or the other.

Reply to
Herb Smith

It seeems that you don't itemize deductions. You are caught in the fact that broker commissions come off the top, i.e. they are part of the trade itself and net out on each transaction. The margin interest flows to schedule A, same form containing mortgage interest, state tax, etc. For those who itemize, margin interest is taken on this form (up to investment income), but if you don't itemize already, the $1000 is still less than your standard deduction, which for 2005 is $5,000. In a similar situation is the person with $4,000 of mortgage interest. If they don't have other deductions to get over that $5,000, they can skip the schedule A altogether. JOE

Reply to
joetaxpayer

You have to be itemizing your deductions before investment interest saves you any taxes. If your standard deduction ($5,000 for a singe taxpayer in 2005) is more than your total itemized deductions, then using the standard deduction saves you more money. The broker's commissions directly increase the cost of your investment or reduce your proceeds on sale. That's just the way Congress made the law.

Reply to
Bill Brown

You're a single fellow, right? And without any other itemized deductions? In this case you get the standard deduction of $5,000 because your other deductions, including margin interest don't exceed that figure. ChEAr$$$$, Harlan Lunsford,EA n LA

Reply to
Harlan Lunsford

Look at it this way: Brokers' commissions are a cost of buying and selling securities. Thus, they are used in calculating gain or loss on the sale of a secutity. On the other hand, margin interest is not a cost of buying and selling. It is a cost of holding securities in your account. Thus, the interest is related to the dividends and interest, not the gain or loss on transactions. So, like other investment expenses, it is deductible on Schedule A. Lanny K. Williams, CPA Nawarat, Williams & Co., Ltd. Income Tax Services for Expatriate Americans

Reply to
L K Williams

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.