How to make better use of your investment interest
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.
Worthless stock? Write it off as a loss, then end up keeping it!
If you currently have some stock that has become
worthless, or even nearly-worthless, you can take a capital loss deduction
for the year it becomes totally worthless. But of the stock still has any
value at all, even a little, using a tax write-off has to be done very
carefully and with a little planning.
There are four basic strategies for writing off nearly
worthless stock- two are used for "keeping" the stock and the other two are
used for writing off the stock and getting your tax savings sooner. Here are
the two strategies for "keeping" the stock:
- Sell the stock, take a capital gain loss (long or
short-term depending on how long you have had the stock), then buy it back
after the 30-day wait period required for tax purposes. If the price of
the stock increases during that time you will have to pay for the
- You can sell the stock to someone who is an
unrelated party (possibly a friend) then take a capital loss. You may be
interested in having your friend keep the asset because of any possible
future increase in the value of the stock; you can buy it back after the
30 days for the same price you sold it for. If the stock has increased in
value, and you buy it back for the same price you sold it for, the
difference in value will come to you as a gift (as long as the party
giving you the gift doesn't exceed their $11,000 yearly limit; it's
$22,000 of married and filing a joint return).
If you are interested in how this can work for you, or
have questions concerning writing off stocks that you are not interested in
buying back, you can call us and we'll be happy to answer your questions.
You can push the limit and actually use capital losses
You can use proceeds from a "loss sale" to reduce your
taxes even further by contributing any portion of the proceeds from the
"loss" to a tax-deductible retirement account like an IRA account or an SEP
or Keogh account (if you are self-employed).
This idea is to use tax-saving capabilities of the
retirement plan to offset additional economic losses. Keeping the funds in
your retirement account is the drawback you take by using this strategy. Not
to worry, because if you are planning on reinvesting these proceeds anyway,
your retirement account will have the added benefit of deferring the income
tax on any earnings until you begin making taxable withdrawals from the
Keeping accurate mutual fund records can help you
If you keep good, accurate records on your mutual
funds and follow a few simple steps, you can minimize any current income tax
due on the sale of mutual fund shares.
All that you have to do is sell high-basis shares in
the fund and identify the sale of these shares in your records. When you are
making the sale, specify to the mutual fund which shares will be sold. The
mutual fund then confirms the sale of the specific shares (in writing, and
in a reasonable amount of time).
By selling the high-basis shares, you are reducing
your current taxable gain. You are left holding the lower-basis shares and
will pay the income tax on the larger gain when you sell them. But if you
have to chose between saving now or later, saving now is always better.
Minimize headaches-and taxes-by limiting mutual fund
check transactions. Many mutual funds offer investors the convenience of
writing checks out of their account. You should know that this should be
used in an emergency only-not on a regular basis.
At first glance, using a mutual fund as a checkbook
and keeping the money in the fund you earn a higher rate than an
interest-bearing checking account is a good idea. But there are at least
three disadvantages to using your mutual fund as a checkbook, and these
easily outweigh the advantage of a higher current income. We'll be glad to
answer your questions concerning these transactions.
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