Did the Tax Write Off for Margin Interest Survive the TCJA?
posted Nov 26, 2018 by Celia Merullo, CPA, MST in the Global Tax Blog
Can you still deduct margin interest on your tax return? Yes! Despite sweeping changes under the Tax Cuts and Jobs Act (TCJA) the margin interest tax write-off survived the legislation.
What is margin interest?
Margin interest is a type of investment interest expense, in other words any amount of interest that is paid on loan proceeds used to purchase investments or securities. (Check out our recent blog, The Investment Interest Expense Deduction) Just like a bank can lend you money if you have equity in your home, a brokerage firm can lend you money against the value of certain stocks, bonds and mutual funds. The borrowed money is referred to as a “margin loan”. With a margin loan, you can purchase additional securities to meet short term financial needs.
What is the margin interest tax write-off?
You can deduct investment interest expense up to the amount of your net investment income.
There are a few qualifications, though.
To be eligible, you must be an investor who borrows money to buy investments, and receives interest, dividends, capital gains, royalties, or other investment income. Also, you must itemize your deductions on schedule A.
As our blog mentions, you can only take the deduction up to the amount of your net investment income. Any disallowed deduction will be carried over for future use. To calculate your net investment income, you can use the following formula:
+ Nonqualified Dividends
+ Short-term Capital Gains
- (Investment-related miscellaneous deduction from Schedule A)
= Net investment Income
So, no changes under the TCJA?
Correct, margin interest will still be deductible for tax year 2018 as an itemized deduction on Schedule A. However, the standard deduction has increased for 2018 and beyond, meaning most taxpayers will not be itemizing deductions since claiming the standard deduction will prove more tax-efficient in many cases. Check out our recent blog, Tax Reform FAQs: Are Personal Exemptions and Standard Deductions still Allowed?
We can help you evaluate the tax costs and benefits of these investments. Reach out to any member of our Tax Services Team.
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