Discussion:Margin Interest - Investment Interest
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Discussion Forum Index --> Basic Tax Questions --> Margin Interest - Investment Interest
Discussion Forum Index --> Tax Questions --> Margin Interest - Investment Interest
| 8 July 2008 | |
| Client had stock account with half his shares on margin. Brokerage charged him $12,400 in margin interest for 06, which was paid to the brokerage out of the proceeds of stock he sold during the year and a personal check he sent in for the remaining margin interest balance. He ended the year with no investment gains or other interest income to offset against the investment interest he paid, however his tax preparer (now out of business) deducted the full $12,400 from his tax return in 06. He is being audited next week. His broker says he should be OK and is sending him a receipt that the margin interest was paid directly in full. Will the margin interest taken on Sch A be allowed as it was paid in full in 06 or disallowed as he had no offsetting gains? | |
RoyDaleOne (talk|edits) said: | 8 July 2008 |
| Did the client have interest and dividend income totaling $12,400 or more? If so the interest should be deductible. | |
| 8 July 2008 | |
| No, client had no interest or dividend income. Believed that because he paid the full interest from proceeds from the sale of stock and by personal check it would still be deductible. | |
Death&Taxes (talk|edits) said: | 8 July 2008 |
| It is deductible in some year, or years, when he has investment income, but from what you write, it will not be deductible in 2006. Investment income is interest, non-qualifying dividends and short term gains, but you can elect to apply it against long term gains or qualified dividends by choosing to tax them as ordinary income in his tax bracket. This could happen if there was a long-term gain on the stock he sold in 2006. | |
Michaelstar (talk|edits) said: | 8 July 2008 |
| And you wonder why he is being audited? I venture to say it is specifically related to the deduction of investment interest (based on the facts you have described) that should have never been taken in 2006. As Dennis pointed out - it is a c/f.
ps - prepare the client for an audit adjustment and let them know of the tax liability (with penalties and interest) b4 you even get to the audit. | |
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