Deducting investment interest expenses used to be fairly straightforward but the 1993 tax law changed all that. Prior to 1993, you could include your net capital gains from the sale of investment assets in the calculation of your total net investment income. Net investment income is an important category, since your Schedule A deduction for investment interest expense (interest you pay on debt related to investment assets) is limited to the net investment income you earn for the same tax year. With the capital gains inclusion, you were able to increase other net investment income, like your interest and dividend income, and thereby increase your allowable deduction for investment interest expense. Capital gains helped to increase your investment income, which also increased your allowable investment interest deduction.
The 1993 tax law changed the rules. Now you cannot treat net capital gains as part of your investment income, to increase your investment interest expense deduction, unless you first elect to treat some, or all, of your net capital gains as ordinary income.
Prior to 1997, making the election to treat some, or all, of your net capital gains as ordinary income made sense (under certain circumstances). The Taxpayer Relief Act of 1997 has all but killed this election. Most taxpayers find they will save more income tax in the long run by carrying over the unused investment interest expense to future years rather than elect to treat net capital gains as ordinary income to deduct more investment interest expense in the current year.
You may be eligible to go back to previous tax years and amend your returns for better tax savings. To find out if this will work with you, call us to set up an appointment today.
