How the investment interest deduction works
IRS Publication 550 says your deduction for investment interest expense is generally limited to your net investment income. You can carry over the amount you could not deduct because of that limit to the next tax year, where it is treated as investment interest again.
To deduct the interest you must itemize deductions on Schedule A, and you work out the limit on Form 4952. You can skip Form 4952 if your interest and ordinary dividend income, less qualified dividends, is more than your investment interest, you have no other deductible investment expenses and you have no carryover from the prior year.
What counts as net investment income
Net investment income is your investment income minus your investment expenses other than interest. Investment income generally includes taxable interest and non-qualified dividends. It does not include qualified dividends or net capital gain unless you choose to include them on Form 4952. This calculator does not work out net investment income for you: type in the figure from your own records.
Interest on money borrowed to buy tax-exempt securities cannot be deducted. If you use the cash method, you can deduct interest on a margin account used to buy taxable securities in the year you paid it.
How the tax saving is estimated
The deduction is the smaller of your interest paid plus any carryforward and your net investment income. The tax saved is that deduction multiplied by the marginal rate you type in, and only if you itemize. Answer yes to itemizing only if your itemized deductions, including this interest, are more than your standard deduction. If they are only partly above it, the real saving is smaller than this estimate. The calculator holds no standard deduction figure because it changes every year.
Worked example: the limit applies
A $50,000 loan at 7% for 12 months costs $3,500 in interest. With net investment income of $2,000 and no carryforward, you deduct $2,000 and carry $1,500 forward. At a 24% marginal rate the deduction saves $480.00, so the interest costs $3,020.00 after tax, which is 6.04% a year compared with 7.00% before tax.
Worked example: all of it is deductible
With the same loan and net investment income of $5,000, the full $3,500 is deductible and nothing carries forward. At 24% the deduction saves $840.00, the interest costs $2,660.00 after tax and the after-tax rate is 5.32%.
Worked example: a small income
Interest of $5,000 (a $62,500 loan at 8% for a year) against net investment income of $1,000 allows a $1,000 deduction and carries $4,000 forward. At 24% the saving is $240.00 and the interest costs $4,760.00 after tax, or 7.62% a year before the carried amount is used in a later year.
Inputs for the investment interest deduction calculator
Do you itemize deductions?
Choose yes only if your itemized total, with this interest, beats your standard deduction. With no, the deduction saves no tax this year.
What the borrowed money buys
Choose tax-exempt securities only if the loan buys nothing taxable. That interest is not deductible.
Amount borrowed, interest rate and months
Interest is the balance times the yearly rate times the months borrowed divided by 12, assuming a level balance.
Net investment income and carryforward
Net investment income sets the limit. The carryforward is interest an earlier year could not deduct.
Your marginal tax rate
The rate on your last slice of income. You type it because it depends on your income, filing status and state.
CALCULATOR QUESTIONS
US investment interest deduction calculator questions
Is interest on a loan to buy investments tax deductible in the US?
Yes, as investment interest expense, if you itemize deductions and the investments are taxable. The deduction is limited to your net investment income, and the rest carries forward to later years.
What happens to interest I cannot deduct this year?
You carry it over to the next tax year, where it is treated as investment interest again.
Do I need Form 4952?
Usually, yes. You can skip it only if your interest and ordinary dividend income less qualified dividends exceeds your investment interest, you have no other investment expenses and no carryover.
Can I deduct interest on a loan to buy municipal bonds?
No. You cannot deduct interest expenses incurred to produce tax-exempt income.
Why is the saving less than the interest times my tax rate?
Because the deduction is capped at net investment income, and because you only save tax if you itemize. The calculator shows the deductible amount and what carries forward.