IRS taxes on your net investment income can add up quickly, putting a serious dent in what you’ve made over the past year.

Fortunately, the investment tax and interest deduction worksheet may provide a way to offset some of that cost—and help ensure more of that money stays in your pocket.

Start by Learning What is Deductible

If you’ve borrowed money to buy property for the purpose of investing, you’ve likely paid interest on that loan. According to the IRS, that interest now qualifies as an “investment interest expense,” which may be deductible on the investment tax and interest deduction worksheet.

For example, if you’ve taken out a loan against, say, the equity in your home, and used that money to buy stock, you paid investment interest. And this expense may now be used to reduce your tax burden.

The investment interest deduction applies only to paid interest on money used to buy investment property that will produce investment income, be it through interest, annuities or dividends. When the investment property generates nontaxable income—such as tax-exempt bonds—the interest deduction is not allowed.

You may also deduct any investment interest expenses that were disallowed during the previous year, taking a little more sting out of your upcoming tax bill.

How Much Tax Will I Pay?

So, how much tax will you pay on your net investment income? When it comes to investments purchased with borrowed money, this depends not only on how much loan interest you paid over the last year, but also on the net income the investment property happened to create.

Once you’ve calculated your net investment income and your investment interest expense paid (current + disallowed), your tax and interest deduction worksheet will ask for the smaller number. This will be your total deduction and the amount ultimately affecting how much tax you’ll pay.

Is There Anything I Can’t Claim?

Generally, any interest paid for investments in “passive activities” won’t qualify for the interest expense deduction. This includes holding an ownership stake in a business that you’re not materially involved in running.

For instance, borrowing $10,000 to buy a stake in a friend’s company is undoubtedly an investment. But if you aren’t involved in the daily operation of that business in any way, you’re engaged in a passive activity—and any interest you paid on the original loan can’t be claimed as an investment interest expense.

Using the Investment Tax and Interest Deduction Worksheet

You can claim investment interest expenses only if you itemize your deductions, which is typically done on your Schedule A. You may also be required to complete Form 4952, which lays out your deduction in more detail.

You’re exempt from filling out the latter form if you meet these three conditions:

  • Your investment income from interest and ordinary dividends minus qualified dividends is more than your investment interest expenses.
  • You don’t have any other deductible investment expenses.
  • You have no disallowed investment interest expenses from the previous year.


To learn if you qualify for the investment interest deduction, stop by your local Liberty Tax® office today.

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