Investment Expenses

To encourage taxpayers to invest, tax laws allow a deduction for interest on loans used to purchase a taxable investment. You can deduct all of your interest, up to the total of your net investment income. Qualified dividend income and net capital gains from the disposition of investment property are not considered investment income. However, you may elect to treat qualified dividends and net capital gains as investment income by subjecting them to ordinary income tax rates.

Under the Tax Cuts and Jobs Act of 2017, you can no longer deduct ordinary and necessary investment expenses as miscellaneous itemized deductions, subject to the 2% floor. Under prior law, brokers’ and mutual fund commissions were generally deducted by adding them to the basis to reduce capital gain upon sale.

Tax Tip

If you have capital gains or dividend income and have investment interest expense, you may want to consider calculating the breakeven point so you can optimize both the capital gain or dividend tax rate and the investment interest deduction.