DEFINITION of 'Form 4952: Investment Interest Expense Deduction'

A tax form distributed by the Internal Revenue Service (IRS) used to determine the amount of investment interest expense that can be deducted and any interest expense that can be carried forward to a future tax year. Form 4952 limits the investment interest expense deduction for an individual, estate or trust to its net income from investment.

BREAKING DOWN 'Form 4952: Investment Interest Expense Deduction'

The IRS has different rules taxpayers must follow, depending on where interest comes from and whether it is investment, personal, business or mortgage-related. If an investor pays or accrues interest on a loan and then uses the proceeds for several different purposes, the taxpayer may have to allocate the interest to ensure that the right interest rule is used.

Interest income may result from money borrowed specifically to purchase investments like parcels of land, commercial or residential investment properties, stocks and non-tax-exempt bonds. However interest income does not include interest generated from vehicles that yield tax-exempt income, such as annuities, municipal bonds or life insurance products. 

Interest types that are non-deductible

Other types of interest that may not be deducted on Form 4982 include any interest expenses that are properly allocable to passive activities, which the IRS defines as rental activities or any businesses in which taxpayers do not materially participate. Passive activities directly counter passive activities, where taxpayers work on consistent, substantial and continuous bases. The IRS prohibits taxpayers from deducting investment interest incurred to produce tax-exempt income or from money borrowed to buy tax-exempt securities or shares in mutual funds or other regulated investment companies that distribute exempt-interest dividends. In addition, passive income does not include salaries, portfolio, or investment income.

Taxpayers usually may not include qualified dividends or long-term capital gains as investment income, because they are already receiving tax breaks on these items, which are taxed at lower rates than most other income. Depending on an individual’s tax bracket, he or she may enjoy the lower tax rate of 0%, 15% or 20%.

There are rules in place that limit the amount of investment interest a taxpayer may deduct. For example, one may not deduct more investment interest than the net investment income reported. Pointedly: net investment income is deemed investment expenses one may subtract from items such as royalties, short-term capital gains, and dividend payments.

For more information on this credit, see IRS Publication 503.

RELATED TERMS
  1. Schedule A

    Schedule A is a U.S. income tax form that is used by taxpayers ...
  2. Itemized Deduction

    Itemized deductions are deductions that allow taxpayers to take ...
  3. Business Interest Expense

    Business interest expense is the cost of interest that is charged ...
  4. Tax Return

    A tax return is a form(s) filed with a taxing authority on which ...
  5. Cash Basis Taxpayer

    A cash basis taxpayer is a taxpayer who reports income and deductions ...
  6. Form 1098

    Form 1098 is a form filed with the Internal Revenue Service (IRS) ...
Related Articles
  1. Taxes

    An Overview of Itemized Deductions

    Itemized deductions will mostly stay the same for 2017 tax year (medical deductions improve under the new tax bill). Big changes start in 2018.
  2. Taxes

    Increase Your Tax Refund With Above-The-Line Deductions

    Find out about these deductions and how you can use them to lower your tax bill.
  3. Taxes

    Making Sense of the 2017 Tax Changes

    Here is a brief overview of some of the changes introduced by the Tax Cuts and Jobs Act of 2017, and how they may affect your taxes.
  4. Taxes

    What's IRS Form 1040 For?

    Most U.S. taxpayers will be familiar with the 1040. By the end of filling it out, you'll know how much tax you owe, or what your refund is.
  5. Taxes

    Insurance-based Tax Deductions You May Be Missing

    Do you know about all these insurance-related deductions? Knowing the tax deductions you're entitled to can make or break your bank account.
  6. Taxes

    Tax Loophole Found for Home-Equity Loan Interest

    Homeowners may still qualify for a tax break on their home-equity loan interest thanks to a loophole in the recent Tax Cuts and Jobs Act.
  7. Taxes

    20 Tax Changes You Need To Know About

    Don't miss out on the tax changes. Here's a list that you need to know about.
  8. Taxes

    How To Get The Most Money Back On Your Tax Return

    These tips will help you get a larger refund this year, while teaching you how to pay less taxes going forward.
  9. Taxes

    Do Your Research Before Claiming These Deductions

    Be sure to read the fine print about any deduction or credit that you’re planning to claim.
  10. Small Business

    Writing off the Expenses of Starting Your Own Business

    Learn how to navigate the complicated rules for writing off the expenses of starting your own business. It could save you a lot of money.
Trading Center