The main topics of this lesson are: Margin Interest; Payments in Lieu (PIL) Paid; Tax Treatment; and Other Expenses. For this lesson refer to the Study Notes and watch the video for a synopsis.
If you trade on margin you pay interest on the funds borrowed to buy securities. Because the interest is
DIRECTLY TRACEABLE to the purchase of securities it is deductible as investment interest. Because
margin interest occurs in your investment account it is presumed to be generated by borrowing for
Payments in Lieu (PIL) Paid
Payments in Lieu of dividends or interest, or PIL, that you pay to the lenders of securities when you sell
short in your own account are also considered to be investment interest. Obviously, the direct
connection to an investment exists as the payment is meant to replace either a dividend or interest
payment that the securities lender lost by loaning the holding.
Investment interest expense is an itemized deduction. If you are a taxpayer who does not itemize then
there is no deduction. Investment interest paid – including PIL – is not directly deductible against interest
or dividends. Additionally, the deduction is limited to the amount of investment income. Use Form 4952
to calculate the deduction.
Be aware of the words DIRECTLY TRACEABLE. Funds can be borrowed from other sources (home equity,
etc.) to make investments and be deductible as investment interest expense. Any borrowings must be
invested without any diversion directly into an investment.
Prior to the 2017 tax act all investment expenses – other than investment interest – were considered to
be miscellaneous itemized deductions. These expenses were subject to the usual limitations on
miscellaneous itemized deductions; the amount deductible had to exceed 2% of AGI and you had to be
itemizing on your return rather than taking the standard deduction. The 2017 tax act eliminated all
itemized deductions so at this time none of these fees are deductible for investors. If you are taking the
position that you are a trader, then the circumstances change. That is the subject of the next module.
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Disclosure: Tax-Related Circular 230 Notice
The information in this presentation is provided for informational purposes only, and does not constitute tax advice and cannot be used by the recipient or any other taxpayer to avoid penalties under any federal, state, local or other tax statutes or regulations, or to resolve any tax issue.