The key factor here is how much of the investment/margin interest your client used and what they used the money for. Investment interest is interest your client pays on loans to keep an investment property. That could be a thing like stocks and securities. Margin interest is interest charged by your client’s broker when they borrow money against their brokerage account. It is more or less considered the same as an investment interest as long as they use the money for investment purposes.
Investment income is your client’s investment property that consists of investment interest, dividends, and short-term capital gains minus any investment expenses they might have.
Investment/margin interest can be written off if it exceeds your client’s investment income. This means that the money they make the gain on their investments if more than the amount of interest that they paid on their loans to make the investment is deductible.
Another option available is to include their long-term capital gain in their investment income. This gain is not included in your client’s investment income but they may choose to include it. The only downside to doing this is that they lose the ability of their capital gains to reduce their tax rate in the future. Long term capital gain is usually gain from stocks or investments they have held for over one year. By including it in your client’s investment income, they increase their investment interest exemption for this year. This means they’ll wind up with more money in their pocket for this tax year. Do remember that in the long term, your client is reducing the exemption they can claim on their long-term capital gains.
Also remember that investment interest on tax free investments cannot be deducted. In addition, keep in mind that your client cannot opt to take the standard deduction and he or she must itemize their deductions. Using standard deductions will yield them no benefits.
