Investment Expenses

To encourage taxpayers to invest more, 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 (gross investment income less investment expenses).

Dividends and net capital gain from the disposition of investment property aren't considered investment income. However, you may elect to treat them as investment income by subjecting them to ordinary income tax rates. This would make more of your investment interest deductible. We can calculate which is best in your situation — capital gain and dividend rate or interest deduction.

You may also carry forward interest deductions that cannot be fully used currently because of the limitation and apply them to future years.

In addition, you can deduct ordinary and necessary investment expenses (except those related to tax-exempt investments) as miscellaneous itemized deductions subject to the 2% of AGI limitation. Deductible expenses in this category include costs of research (i.e., relevant subscriptions and professional advice) and security measures (i.e., safe deposit boxes).

Expenses which aren't directly deductible include stock-brokers' fees, legal fees, or title insurance — all of which are usually treated as adjustments to the purchase or sale price of the investment.