Another Way to Look at the Investment Interest Deduction...Tax Tip of the Week | No. 189

How to Maximize Your Investment Interest Deduction

Typically, investment interest is only deductible to the extent of investment income.  Any investment interest not allowed in the current year due to the investment income limitation is carried forward indefinitely. Generally, qualified dividends and net capital gain from the disposition of investment property are not considered to be investment income.  However, you can make an election to treat net capital gains and qualified dividends as investment income to maximize the investment interest deduction. The down-side of this election is that such income will now be taxed as ordinary income as opposed to the favorable qualified dividend and long-term capital gain rates. If you have been accumulating non-deductible investment interest for several years with no foreseeable opportunity to realize this deduction, you should consider making this election.  This is a particularly strong tax planning tool if your ordinary tax rate in the year of the election is in the lower marginal tax rate brackets.  You can also make this election on an amended return, but it must be made within six months of the unextended due date of the original return. This tax tip can get confusing.  We suggest you let us look at your situation to see if it makes sense for you.

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You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt - the guy behind TTW...until next week.