How margin interest is charged
Margin interest is the balance times the annual rate times the days borrowed, divided by the days in the interest year. Many US brokers use a 360-day year and some use 365, so the basis is a choice here. Check your margin agreement for the one your broker uses. Your balance and rate can change from day to day, so this calculator assumes a level balance and one rate.
Is margin interest tax deductible?
Margin interest on a loan used to buy taxable securities is investment interest expense. IRS Publication 550 says a cash-method taxpayer can deduct it in the year it is paid, that the deduction is generally limited to net investment income, and that you can carry over what the limit disallows. You must itemize on Schedule A to deduct it, and interest on money used to buy tax-exempt securities cannot be deducted.
The calculator estimates the tax saved as the deductible interest times the marginal rate you type in, only if you itemize. It then shows the interest after tax, the after-tax yearly rate and the return you need on the borrowed money to break even. It holds no standard deduction figure, so say yes to itemizing only if your itemized total, with this interest, beats your standard deduction.
Worked example: the interest and the deduction
A $50,000 margin balance at 8% for 90 days on a 360-day basis costs $1,000.00 in interest, or $11.11 a day. With net investment income of $2,000 all of it is deductible. At a 24% marginal rate the saving is $240.00, so the interest costs $760.00 after tax. That is 6.08% a year after tax, and the borrowed money must return 1.52% over the 90 days to break even, compared with 2.00% if the interest were not deductible.
Worked example: the net investment income limit
A $300,000 balance at 8% for 366 days on a 360-day basis costs $24,400.00 in interest. With net investment income of $2,000 only $2,000 is deductible this year and $22,400 carries forward. At 24% the saving is $480.00, so the interest costs $23,920.00 after tax.
Worked example: the day count
Borrowing $3,000 at 5% for 30 days on a 360-day basis costs $12.50. Borrowing $20,000 at 7.5% for 7 days costs $29.17 on a 360-day basis and $28.77 on a 365-day basis, a difference of about 1.4%.
The margin call price
Equity is the portfolio value minus the loan. If your broker needs equity of at least 30% of the portfolio, a margin call happens when the portfolio falls to the loan divided by 70%. For a $50,000 loan that is $71,428.57. A $100,000 portfolio is $28,571.43 above that level, so a fall of 28.57% would trigger a call, and your equity today is 50.00% of the portfolio. At a 25% requirement the level is $66,666.67.
If your portfolio is already below the call level, the calculator shows how far short it is instead. Brokers set their own maintenance requirements and apply them position by position, so use the figure in your agreement and treat this level as a guide. If a call is not met your broker may be able to sell your holdings, so read your agreement.
Inputs for the margin interest tax deduction calculator
Days in the interest year
The divisor for the daily rate, 360 or 365. Your broker's margin agreement says which.
Margin loan balance, rate and days borrowed
The amount you owe, the yearly rate and the days in the tax year it was outstanding.
Portfolio value and maintenance margin
Used for the margin call price. The maintenance margin is the minimum equity share your broker requires.
Net investment income, carryforward and marginal rate
These set the deduction and the tax saved. Leave the carryforward at 0 if you have none.
CALCULATOR QUESTIONS
US margin interest tax deduction calculator questions
How do you calculate margin interest?
Balance times the annual rate times the days borrowed, divided by 360 or 365 depending on your broker. For example $3,000 at 5% for 30 days on a 360-day basis is $12.50.
Is margin interest tax deductible?
Yes as investment interest expense if you itemize and the loan buys taxable securities, up to your net investment income. What the limit disallows can be carried over.
What is a margin call?
A demand from your broker to add cash or securities when your equity falls below its maintenance requirement. If you do not meet it, the broker may sell your holdings.
Why is my after-tax rate not just my rate times one minus my tax rate?
That shortcut only holds when all the interest is deductible and you itemize. If net investment income is smaller than the interest, or you take the standard deduction, the saving is smaller.
Does this include fees, dividends or tiered rates?
No. It uses one rate and a level balance, and it does not model dividends, trading costs or tiered broker pricing.