Using Excess Investment Interest Expense From Previous Years (Form 4952) and Current Year Investment Interest Expense

Forum|Forum|1 year ago
November 15, 2024
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Hello,

Thank you in advance for any information.

On my CY2023 return (filed in April 2024), I had carry-forward capital losses shown on Schedule D, and excess investment interest expense shown on Form 4952 . During CY2024, I have also have incurred investment interet expenses.

For my upcoing CY2024 tax return, Turbotax will likely eliminate the capital loss carry-forwards if there are sufficient realized capital gains during the year. It would not seem to matter much if the realized capital gains for CY2024 are long-term or short-term, but the system will likely first try to match short-term capital gains to short-term loss carry forwards.

So far during CY2024, there are more realized short-term capital gains than long-term capital gains. It is my understanding that ultimately any type of realized capital gain, either long-term or short-term, will eliminate any kind of capital loss carry-forwards, either long-term or short-term. There are more long-term capital loss carry-forward than short-term.

If there is good fortune later in CY2024, and total capital gains, either short-term or long-term, exceed all the capital loss carry-forwards shown on Schedule D, will TurboTax automatically apply all of the investment interest expenses incurred (both the carry-forward values shown on Form 4952 and the amount incurred during CY2024) to eliminate the tax obligation (Federal, State of NY, and 3.8% surcharge) on additional short-term capital gains, and ask me if I would like to elect to use investmnt interest expense to cover any additional long-term capital gains?

Are there any limitations to the ability to use the investment interest expense for any one tax year? I read that any time there is an election to use the investment interest expense to cover long-term capital gains that the tax filer must itemize deductions, presumably even if the itemized deductions turns out to be below the standard deduction, as would be the case if real estate taxes max out at $10,000 and if there is no mortgage interest expense). The filer can still file and benefit from the election, but must forgo use of the standard deduction which would normally help the tax filer.

Thank you kindly!

Mike9241

by default qualified dividends (QD) and net long-term capital gains (LTCG) are excluded from investment income for purposes of determining deductible investment interest. you can make an election to include as much QD and LTCD as you want if needed or wanted to increase the deduction for investment interest expense.

doing so will disqualify those amounts for the special rate that QD and LTCG get.

JJ99000Author

Thank you Mike.

By making the election to use investment interest expense to cover net long-term capital gainst (LTCD) and qualified dividends (QD), is "disqualifying those amounts for the special rate that QD and LTCG get" not important because by making the deducting, there would be no amount to actually tax? So the election avoids Federal taxes and potentially the 3.8% surcharge if the gains are large enough? I believe NY would match Federal tax treatment, so there would be no NY State/Local Taxes due as well? Does this sound accurate to you?