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Form 4952 is used to calculate the amount of investment interest expense such as margin loan interest that is deductible on Schedule A.
You do not have to file Form 4952 if you meet all of the following conditions: (1)Your investment interest expense is not more than your investment income from interest income and ordinary dividends, (2) You have no other deductible investment expenses, and (3) You have no carryover of investment interest expense from your previous year tax return.
Tax Tips for Form 4952
Investment income is income from interest, dividends, annuities, royalties and any net gain from dispositions of investment property. Long-term capital gain isn't included in investment income for purposes of calculating the investment interest deduction, however, short-term gain is included in investment income. You can choose to report part or all of your long-term capital gain as short-term capital gain if you want to deduct more of your investment interest expense. For example, if you have $10,000 in margin loan interest expense, $15,000 of long-term capital gain and $500 of dividend income, you can only deduct $500 of the margin interest expense on your current tax return. The other $9,500 in investment interest expense will carry forward to future years and can be deducted to the extent that you have investment income in the future. However, if you wanted to deduct the full $10,000 in the current year, you could choose to report $9,500 of your long-term capital gain as short-term capital gain. This allows you to deduct all $10,000 in investment interest expense in the current year. The disadvantage is that you don't get the reduced 20% tax rate for long-term capital gains. However, it is probably a good choice to make if your investment interest expenses are significantly more than your investment income so you will be unable to use much of the investment interest expense deduction in future years unless you choose to treat the long-term gain as short-term gain.