Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357


Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357
wwwStudent Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357PaylesstaxStudent Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357com
Toll Free (877)CPA-Help or (877)272-4357
Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357
Don Fitch CPA's
professional services include Guaranteed results with the IRS, tax returns for ALL 50 STATES,  Financial and IRS Audits, Financial Reviews, Compilations, IRS Discovery's, Natural Disaster Relief, Lender Letters, and CPA Employment Verification


Penalty and Interest by Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357
Student Loan Interest
 Page


Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357
Chat Live with a CPA

Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357
Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Free
Website Contact Form sent directly to Don Fitch, CPA
 
Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Free Phone Tax Consultation
 
Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Free Tax Forms from 1980 to Present
 
Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Free Online Tax Chat with Don Fitch, CPA
 
Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Free Video Conference with Don Fitch, CPA


Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Actual IRS Wage Levy Releases
 
Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Actual IRS Offers in Compromise
 
Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Actual Testimonials
 
Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Actual Lien Releases


Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Don Fitch CPA's Guaranteed IRS Wage Levy Release Program
 
Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Haven't Filed in Years!  What should I Do?
 
Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357What to Look for in a CPA
 
Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Taxes and Bankruptcy


We prepare Federal and State Tax Returns for ALL 50 States!
Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357
(Individual)


Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357
(Amended)

Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357
(Partnership)


Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357
(Trust)


Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357
(Corporation)


Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357
(Sub S-Corporation)


Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357
(Estate)


Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357
(Gift Tax)


Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357
(Federal Unemployment Taxes)


Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357
(Payroll Taxes)


Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357(Non Profit)


Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357
(Information)



Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357
Don Fitch CPA's Resume


Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357
Webmaster's Resume



Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Don Fitch CPA's Employment Opportunities
 
Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Directions to Don Fitch CPA


Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357


Student Loan Interest

TYPES OF INTEREST

The following sections examine the most common categories of interest that
are deductible under Code Section 163. These categories are: (1) personal
interest; (2) student loan interest; (3) qualified residence interest;
and (4) investment interest.


(a) PERSONAL INTEREST

Personal interest is defined in a negative manner: It includes all
interest other than trade or business interest, investment interest,
passive activity interest, qualified residence interest, and interest on
estate tax payments that are deferred because of a reversionary interest
under Code Section 6163. Thus, any personal interest that does not
fall into one of these categories is not deductible.

Personal interest includes interest on a loan to purchase an automobile
for personal use, to purchase a life insurance policy, and credit card
interest, where the interest is not incurred or continued in connection
with the conduct of a trade or business. Interest paid on underpayments of
individual federal, state, or local income taxes also is personal
interest, notwithstanding that all or a portion of the additional tax due
may be attributable to income generated in the taxpayer's trade or
business.

OBSERVATION: There has been some controversy as to the status of this
rule, as the Tax Court originally held in Redlark v. Commissioner,
106 T.C. 31 (1996), rev'd and remanded, 141 F.3d 936
(9th Cir. 1998), that the regulations prescribing it were invalid.
However, the Fourth, Sixth, Seventh, Eighth, and Ninth Circuits
subsequently held that they were, and the Tax Court in
Robinson v. Commissioner, 119 T.C. No. 4 (2002),
conceded that the regulations are valid, and held that it will no
longer follow Redlark.


(b) STUDENT LOAN INTEREST

Code Section 221 allows a deduction for interest payments due and paid
after December 31, 1997, on any qualified education loan. The interest
paid on the qualified education loans may be claimed as an above-
the-line deduction, up to a maximum of $2,500 per year. Code Section
221(b)(1). The maximum deduction is phased in over four years, with a
$1,000 maximum deduction in 1998, $1,500 in 1999, $2,000 in 2000, and
$2,500 in 2001. Code Section 221(b)(1). The $2,500 maximum deduction
amount is not indexed for inflation.

COMPLIANCE TIP: An individual that pays more than $600 in student
loan interest in a calendar year will receive from the payor a
statement on Form 1098-E, Student Loan Interest Statement, reporting
the amount of interest and other information. Reg. Section 1.6050S-
3.

For tax years ending after December 31, 2001, the deduction for student
loan interest is phased out for taxpayers with modified AGI of $50,000 to
$65,000 ($100,000 to $130,000 for joint returns), indexed for inflation
after 2002. Code Section 221(b)(2). For earlier years, the deduction
for student loan interest is phased out ratably for individual taxpayers
with modified AGI of $40,000 to $55,000 ($60,000 to $75,000 for joint
returns). Code Section 221(b)(2), prior to amendment by Pub. L. 107-16,
Economic Growth and Tax Relief Reconciliation Act of 2001, Section 412.

EXAMPLE: During 2001, Judy paid $2,600 interest on a qualified
student loan. She files a joint return with Bill. Their modified AGI
is $70,000. The most they can deduct is $2,500. They must reduce this
amount by $1,667:

70,000 - 60,000
$2,500 X --------------- = 1,667
$15,000

Judy and Bill's deductible student loan interest for 2001 is $833.

Modified AGI is the taxpayer's AGI determined without reference to the
exclusions for foreign income and housing allowances provided in Code
Sections 911, 931, and 933, discussed in Ch. 161, and, for tax years after
2001, the deduction for qualified higher education expenses under Code
Section 222, discussed in Section 31.5 It is computed taking into
account the rules on the taxation of social security under Code Section
86, the exclusion for income from savings bonds used for education
expenses under Code Section 135, the exclusion of employer- provided
adoption benefits under Code Section 137, the deduction for contributions
to IRAs under Code Section 219, and the passive activity loss rules under
Code Section 469. Code Section 221(b)(2)(C).

For loan interest paid before January 1, 2002, in tax years ending before
that date, the deduction for student loan interest is allowed only with
respect to interest paid on a qualified education loan during the first 60
months in which interest payments are required. Code Section 221(d),
prior to repeal by Pub. L. 107-16, Economic Growth and Tax Relief
Reconciliation Act of 2001, Section 412(a). <63> Months during which the
qualified education loan is in deferral or forbearance do not count
against the 60-month period. For purposes of this rule, any loan and all
refinancings of the loan are treated as one loan. Code Section 221(d),
prior to repeal by Pub. L. 107-16, Economic Growth and Tax Relief
Reconciliation Act of 2001, Section 412. In the case of a qualified
education loan that is not issued or guaranteed under a federal post-
secondary education loan program, the 60-month period is suspended only if
the borrower satisfies certain conditions established by the U.S.
Department of Education. Prop. Reg. Section 1.221-1(e)(3). No deduction
is allowed for interest on a payment required to be made before the end
of the 60-month period that is actually made after the 60-month period.
Prop. Reg. Section 1.221-1(e)(4). In the case of multiple loans that are
refinanced by or secured as a single loan (consolidated and collapsed
loans) and loans that were made before August 5, 1997, the 60-month
period begins on (1) the most recent date on which any of the loans
subject to consolidation or collapse went into repayment status, if the
payee knows or has reason to know that date, or (2) January 1, 1998, if
the payee does not know or have reason to know that date. Notice 98-7,
1998-1 C.B. 339.

A qualified education loan is any indebtedness incurred by the taxpayer
solely to pay for the qualified education expenses of the taxpayer, the
taxpayer's spouse, or any dependent of the taxpayer. Code Section
221(d)(1). Thus, the deduction may be claimed only by a taxpayer who is
legally obligated to pay interest on the indebtedness. The qualified
higher education expenses must be incurred within a reasonable period of
time before or after the indebtedness is incurred. Prop. Reg. Section
1.221-1(f)(3)(B). The expenses are treated as paid or incurred within a
reasonable period of time before or after the indebtedness is incurred if
the expenses relate to a particular academic period and the loan proceeds
are disbursed within a period that begins 60 days prior to the start of
that academic period and ends 60 days after the end of that academic
period. Prop. Reg. Section 1.221- 1(f)(3)(ii).

EXAMPLE: Henry signs a promissory note for a loan on August 15, 2000,
to pay for qualified higher education expenses for the Fall 2000 and
Spring 2001 semesters. On August 20, 2000, loan proceeds are
disbursed by the lender to Henry's college and credited to his
account to pay qualified higher education expenses for the Fall 2000
semester, which begins on August 23, 2000. On January 25, 2001,
additional loan proceeds are disbursed by the lender to Harry’s
college and credited to Harry’s account to pay qualified higher
education expenses for the Spring 2001 semester, which began on
January 10, 2001. Henry’s qualified higher education expenses for the
two semesters are paid within a reasonable period of time, as the
first loan disbursement was made within 60 days prior to the start of
the Fall 2000 semester and the second loan disbursement was made
during the Spring 2001 semester.

Because the debt must be incurred solely to pay qualified higher education
expenses, mixed use loans are not qualified education loans. Prop. Reg.
Section 1.221-1(f)(4), Ex. 5. Similarly, revolving lines of credit (e.g.,
credit card debt) generally are not qualified education loans, unless the
borrower uses the line of credit solely to pay qualified higher education
expenses.

EXAMPLE: John signs a promissory note for a loan secured by John's
personal residence. Part of the loan proceeds will be used to pay for
certain improvements to John’s residence and part of the loan
proceeds will be used to pay qualified higher education expenses of
John’s spouse. Because the loan is not incurred by John solely to pay
qualified higher education expenses, the loan is not a qualified
education loan.

COMPLIANCE TIP: Starting in 2003, unless the loan is subsidized,
guaranteed, financed, or otherwise treated as a student loan under a
program of the federal, state, or local government or an eligible
educational institution, the payee must request and obtain a
certification from the payer that the loan will be used solely to pay
qualified higher education expenses. The payee can use Form W-9S,
Request for Student's or Borrower's Social Security Number and
Certification, to request and obtain the certification, develop a
separate form, or incorporate the certification into other forms it
customarily uses, such as loan applications, as long as it is clearly
set forth. If this certification is not completed, the loan is not
treated as a qualified education loan for purposes of the reporting
requirements. Reg. Section 1.6050S-3(e)(2).

Qualified higher education expenses generally include tuition, fees, room
and board, and related expenses, reduced by certain educational benefits
that are excludable from gross income (e.g., amounts excluded under Code
Section 135, excludable distributions from a Coverdell education savings
account under Code Section 530, Code Section 117 scholarship or
fellowship grants, Code Section 127 employer-provided educational
assistance, and, for taxable years beginning after December 31, 2001,
excludable distributions from a Code Section 529 qualified tuition
program. Code Section 221(d)(2). Such expenses must be paid or
incurred within a reasonable period before or after the indebtedness is
incurred, and must be attributable to a period when the student is at
least a half-time student. Code Section 221(d)(1).

A qualified education loan includes indebtedness used to refinance
indebtedness that qualifies as a qualified education loan. Code Section
221(d)(1). A qualified education loan does not include any indebtedness
owed to a person who is related to the taxpayer within the meaning of
Code Section 267(b) or Code Section 707(b). Code Section 221(d)(1). In
addition, a loan made under any qualified employer plan (as defined in
Code Section 72(p)(4) ) or under any contract referred to in Code
Section 72(p)(5) is not a qualified education loan. Prop.
Reg. Section 1.221-1(f)(3)(iii). The loan does not have to be issued or
guaranteed under a federal post-secondary education loan program to be a
qualified education loan. Prop. Reg. Section 1.221-1(f)(3)(iv).


An eligible educational institution has the same meaning given by Code
Section 25A(f)(2) for purposes of the Hope Credit for Higher Education
Expenses. Code Section 221(d)(2). Thus, eligible educational institutions
include post-secondary educational institutions and certain vocational
schools. They also include institutions conducting internship or
residency programs leading to a degree or certificate awarded by an
institution of higher education, a hospital, or a health care facility
which offers post-graduate training. Prop. Reg. Section 1.221-1(f)(1).
See Section 31.2

An eligible student has the meaning given by Code Section 25A(b)(3) for
purposes of the Hope Credit for Higher Education Expenses. Code Section
221(d)(3). Thus, the qualified education expenses must be attributable to
a period when the student is at least a half-time student. See Section
31.2

No deduction is allowed to an individual for the taxable year if a
dependency exemption with respect to the individual is allowed to another
taxpayer for the taxable year beginning in the calendar year in which the
individual's taxable year begins. Code Section 221(c). If a taxpayer is
married at the close of the taxable year, the deduction is allowed only
if the taxpayer and his spouse file a joint return for the taxable year.
Code Section 221(e)(2). Marital status is determined under Code Section
7703. Code Section 221(f)(2).

EXAMPLE: Bonnie, a student, pays $750 of interest on qualified
education loans during 2001. Only Bonnie is legally obligated to make
the payments. Bonnie's parent claims her as a dependent and a
deduction under Code Section 151 is allowed with respect
to Bonnie in computing the parent's 2001 federal income tax. Neither
Bonnie nor her parent may deduct the $750 of interest paid in 2001
under Code Section 221.

No deduction is allowed for any amount for which a deduction is allowable
under any other provision of the Code. Code Section 221(e)(1). For
example, if the interest paid is interest on a home equity loan and is
deductible as an itemized deduction, the interest paid does not qualify
for the deduction under Code Section 221.

PRACTICE TIP: The rule that the taxpayer must be legally obligated to
pay interest on the indebtedness to be entitled to claim the
deduction requires that she be primarily responsible for payment of
the loan. Therefore, the student rather than the parent should take
out the loan. Many student loans carry a subsidized interest rate.
Furthermore, the adjusted gross income limitations on claiming the
deduction precludes many parents from taking a deduction in any
event. Parents who want to claim the interest deduction may be better
advised to take out a home equity loan which will enable them to
claim an itemized interest deduction.

Any person in a trade or business or any governmental agency that receives
$600 or more in qualified education loan interest from an individual
during a calendar year must provide an information report on such interest
to the IRS and to the payor, using Form 1098-E. In general, Form 1098-E
must include the name, address, and taxpayer information number of the
person with respect to whom the interest was received and the aggregate
amount of interest received for the year. It must also state that the
payor may not be able to deduct the full amount of interest reported. <66>

OBSERVATION: Although interest for this purpose includes loan
origination fees and capitalized interest, recipients of student loan
interest are not required to report payments of loan origination fees
and capitalized interest as interest on loans made before January 1,
2004, even though they may be deductible. Reg. Section 1.6050S-
3(e)(1). Thus, the amount of the deduction may
be greater than the amount reported by the recipient. In this case,
Forms 1098-E required to be filed in 2003 and later years must state
that the payer of the interest may be able to deduct additional
amounts. Reg. Section 1.6050S-3(d)(1).

The deduction for student loan interest is effective for interest payments
due and paid after December 31, 1997, on any qualified education loan. In
the case of an existing qualified education loan, interest payments
qualify for the deduction under Code Section 221 to the extent that the 60-
month period has not yet expired. Prop. Reg. Section 1.221-1(e)(2). If
interest payments were first required before January 1, 1998, the months
in which those payments were required count against the 60-month time
limit for the loan. Notice 97-60, 1997-2 C.B. 310.

OBSERVATION: Interest payments on loans taken out years ago may still
be deductible. For example, if payments on a qualifying loan started
in January 1997, the taxpayer will be able to deduct the full 12
months of interest for 2000 and a full 12 months interest for 2001
before the 60-month period in effect before 2002 runs out -- and even
then, interest will continue to be deductible because the 60-month
rule is eliminated for loan interest paid after December 31, 2001, in
taxable years ending after that date. Code Section 221.
<67> In those cases where the 60-month period has already expired,
the repeal of the 60-month rule will restore the deduction for
interest paid after the repeal becomes effective.


(c) QUALIFIED RESIDENCE INTEREST

Qualified residence interest is not subject to the limitation on personal
interest. Code Section 163(h)(2)(D). Qualified residence interest
basically means interest paid or accrued during the taxable year on debt
secured by either (1) the taxpayer's principal residence, or (2) one
second dwelling unit of the taxpayer to the extent it is considered to be
used as a residence within the meaning of Code Section 280A(d)(1). Code
Section 163(h)(4)(A)(i).

Qualified residence interest is limited to amounts paid or incurred on
"acquisition indebtedness" and "home equity indebtedness." Code Section
163(h)(3)(A). "Acquisition indebtedness" is debt that is both (1) secured
by a qualified residence and (2) incurred in acquiring, constructing or
substantially improving the residence. Code Section 163(h)(3)(B)(i).
However, the total of acquisition, construction, and improvement loans
taken into account is limited to $1,000,000 ($500,000 in the case of
married individuals filing separately). Code Section 163(h)(3)(B)(ii).

Indebtedness secured by a qualified residence that is not acquisition
indebtedness is considered "home equity indebtedness" to the extent of the
difference between the amount of outstanding acquisition indebtedness and
the fair market value of the qualified residence (the equity). Code
Section 163(h)(3)(C)(i). Home equity indebtedness resulting in deductible
qualified residence interest may not exceed $100,000 ($50,000 in the case
of married individuals filing separately). Code Section
163(h)(3)(C)(ii).

PRACTICE TIP: In view of this limitation, a taxpayer may find it
advantageous to deduct interest paid on home equity indebtedness
under the general interest tracing rules. Go to Sample Election Not
to Treat Debt as Secured by Qualifying Home Equity Indebtedness.


For a full discussion of qualified residence interest, see Section 90.4



(d) INVESTMENT INTEREST

Investment interest is deductible, but only to the extent of a taxpayer's
net investment income. Investment interest that is disallowed is
carried forward to the next taxable year. Code Section 163(d)(2).
Disallowed investment interest may be deducted in a subsequent year only
to the extent the taxpayer has net investment income in that year, but
may be carried forward indefinitely. In response to a series of losses
in court, <69> the IRS ruled in Rev. Rul. 95-16, 1995- 1 C.B. 9, that the
amount of disallowed investment interest that can be carried forward is
not limited to the taxpayer's taxable income in the year of the
disallowance. This ruling reversed an earlier position of the IRS that
the carryover was available only to the extent that Code Section 163(d)
alone caused interest not to be deductible. Rev. Rul. 86-70, 1986-1 C.B.
83. In Rev. Rul. 86-70, the IRS reasoned that if the taxpayer's taxable
income was less than the amount of the disallowed interest deduction, the
excess interest would not have been deductible in any event, and no
carryover should be allowed. The IRS believed that Code Section 163(d)
was intended to disallow (or defer) the deduction of excess investment
interest and not to create a carryover for interest that otherwise would
be nondeductible. However, in light of the case law on the subject, the
IRS reversed its position with the issuance of Rev. Rul. 95-16, above.

Investment interest is interest paid or accrued on indebtedness properly
allocable to property held for investment. Code Section 163(d)(3)(A).
Qualified residence interest and passive activity interest are
specifically excluded from investment interest. Code Section
163(d)(3)(B)(ii).

The IRS ruled that interest incurred by an individual on money borrowed to
purchase stock of his employer corporation to protect his employment was
investment interest. According to the IRS, the interest paid was
investment interest, even though the corporation had never paid a dividend
and the taxpayer's sole purpose for purchasing the stock was to protect
his employment. This ruling prevents the interest from being characterized
by Code Section 163(h)(2)(A) as interest attributable to the trade or
business of being an employee and, thus, nondeductible personal
interest.

OBSERVATION: Note that the IRS has ruled privately that investment
interest on debt incurred to purchase C corporation stock can be
recharacterized as trade or business interest when corporations
convert from C status to S status. PLRs 9037027, 9040066.

OBSERVATION: The investment interest limitation of Code Section
163(d) is not intended to disallow a deduction for interest expense
that must be capitalized in the same year or is disallowed under
another provision.

(d)(1) Property held for investment defined

Property held for investment is defined by reference to the passive
activity loss rules. Property held for investment is property that
produces income that would be considered portfolio income under the
passive activity loss rules. Thus, it generally is property that produces
income from interest, dividends, annuities, royalties not derived in the
ordinary course of a trade or business, or gain not derived in the
ordinary course of a trade or business from the disposition of property
held to produce income of this type or for investment. See Section 50.10
For example, when a taxpayer customarily offers credit to its customers,
its accounts receivable are not property held for investment; however,
its cash bank accounts are, because they produce interest not derived in
the ordinary course of business. TAM 200010004. Property held for
investment also includes any interest in an activity involving the
conduct of a trade or business that is not a passive activity with
respect to which the taxpayer does not materially participate. Code
Section 163(d)(5)(A).

In Rev. Rul. 93-68, 1993-2 C.B. 72, the IRS ruled that employer
corporation stock purchased by an employee to protect his employment was
property purchased for investment because stock generally produces
dividend income. The IRS stated that Code Section 163(d) looks to the
type of income an asset produces rather than the taxpayer's motivation
for acquiring the asset.

OBSERVATION: Rev. Rul. 93-68 is a beneficial ruling
because if the taxpayer's motive, relating to his trade or business
of being an employee, controlled, the interest would be nondeductible
personal interest under Code Section 163(h)(2)(A). It is also
beneficial in that it permits the stock to
be treated as property held for investment without reference to the
taxpayer's actual intent. Thus, if the stock becomes worthless, the
employee is not precluded from taking the position that the stock was
acquired to protect her employment and the loss is thus an ordinary
business loss rather than an investment-related capital loss.


(d)(2) Net investment income defined

Net investment income is investment income net of investment expenses.
Code Section 163(d)(4)(A). Investment income is the sum of:(1) gross
income from property held for investment, (2) the excess (if any) of (i)
net capital gain attributable to the distribution of property held for
investment, over (ii) the net capital gain determined by only taking into
account gains and losses from dispositions of property held for
investment, plus (3) so much of the net capital gain referred to in (i)
or (ii) (whichever is lesser) as the taxpayer elects to take into
account. Investment income does not include income derived from
passive activities. Code Section 163(d)(4)(D).

If a taxpayer elects under Code Section 163(d)(4)(B)(iii) to take all or
a portion of certain net capital gains that are attributable to
dispositions of property held for investment into account as investment
income, the capital gains affected by this election are not eligible for
the maximum tax rate imposed on such gains. Reg. Section 1.163(d)-1(a).
Normally, the election will be desirable (to the extent of otherwise
suspended investment interest expense), if the immediate ability to
deduct investment interest outweighs the value of the deduction
carryover. The election generally must be made on or before the due date
(including extensions) of the income tax return for the taxable year in
which the net capital gain is recognized; (Reg. Section 1.163(d)-1(b))
however, because it is a regulatory election, the IRS may grant an
extension of up to six months if the taxpayer acted reasonably and in
good faith and the extension does not prejudice the interests of the
government (Reg. Section 301.9100-3). See Section 605.15 for discussion
of extensions of time to make elections. It must be made on Form 4952,
Investment Interest Expense. Reg. Section 1.163(d)-1(b). This election is
revocable only with the IRS's consent. Reg. Section 1.163(d)-1(c).


EXAMPLE: In 1997, Amy has a $10,000 long-term capital gain
attributable to investment property that will be taxed at 20 percent
if she does not make the Code Section 163(d)(4)(B)(iii) election.
In addition, she has $10,000 of
investment interest expense that will be suspended for regular tax
purposes absent the election. If she elects to include the capital
gain in investment income (for regular tax purposes) then she
realizes a net 1997 tax benefit of $1,960 ($3,960 in tax savings from
the additional $10,000 deduction less $2,000 in additional tax from
loss of the 20 percent gain rate ceiling). Without the election, she
may be able to realize a $3,960 tax benefit by carrying the $10,000
of suspended investment interest into 1998, but this assumes that she
has more investment income from other sources in 1998 and ignores the
time value of money. Therefore, Amy may still prefer to make the
election in 1998.

COMPLIANCE TIP: The election is made by including the net capital
gain in net investment income Part II of Form 4952, Investment
Interest Expense Deduction.

OBSERVATION: Congress did not address the AMT treatment of this
election. Because long-term capital gains are not entitled to
preferential treatment for AMT purposes, the election would not
affect how the capital gain is taxed for AMT purposes. Therefore, the
election should always be made if the taxpayer with otherwise
suspended investment interest expense wishes to reduce tentative
minimum tax.

Investment expenses are deductible expenses, other than interest, directly
connected with the production of investment income. Code Section
163(d)(4)(C). If depreciation or depletion deductions are allowed with
respect to assets that produce investment income, investment expense must
be determined using the actual depreciation or depletion deductions
allowable. <74> Investment expenses do not include losses derived from
passive activities. Code Section 163(d)(4)(D).


(d)(3) Coordination with the 2 percent AGI floor on miscellaneous
itemized deductions

Investment expenses that are deductible as miscellaneous itemized
deductions are taken into account to reduce net investment income only to
the extent that they exceed 2 percent of the taxpayer's adjusted gross
income (AGI). <75> However, in computing the amount of expenses that
exceed the 2 percent AGI floor, expenses that are not investment expenses
are treated as disallowed before any investment expenses are treated as
disallowed.

EXAMPLE: Willie has an AGI of $130,000, which includes $10,000 of
investment income. In addition, he has investment interest expenses
of $12,000 and miscellaneous itemized deductions of $4,000, which
includes $1,800 of investment expenses. Because of the 2 percent AGI
floor, Willie's miscellaneous itemized deductions are deductible only
to the extent they exceed $2,600 (2 percent x $130,000). Thus, $1,400
($4,000 - $2,600) is deductible. The entire $1,400 is treated as
investment expenses for purposes of the investment interest
limitation. Thus, net investment income is $8,600 ($10,000 - $1,400),
and only $8,600 of Willie's investment interest of $12,000 is
deductible. The remaining $3,400 can be carried forward.


Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357
Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357

Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357


TO CONTACT
wwwStudent Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357
PaylesstaxStudent Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357com

Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Call Toll Free for our assistance/help at: (877)CPA-Help or (877)272-4357.  Direct Line (760)674-1722 .

Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Email your request for our assistance/help to: DonFitchCPA@paylesstax.com.

Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Website Contact Form  http://www.paylesstax.com/dfacontact.html

Guaranteed Results with the IRS and Tax Returns for All 50 States by Don Fitch CPA at (877)CPA-Help or (877)272-4357 Website www.Paylesstax.comVideo Conference with a CPA!

Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Fax your request for our assistance/help to: (760)836-0968 or (760)406-5001.

Don Fitch | Create Your Badge


Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Chat Live with a CPA

Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357


Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357
 


Professional
 ServicesStudent Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357
Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357


Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357
Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357


Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357


Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357www.Paylesstax.com's Favorite Accounting Links
 
Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357www.Paylesstax.com's Favorite Tax Links
 
Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357www.Paylesstax.com's Favorite IRS Links
 
Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357www.Paylesstax.com's Favorite State Tax Links
 
Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357www.Paylesstax.com's Favorite Tax Publisher & Research Links
 
Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357www.Paylesstax.com's Favorite Computer Links
 
Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357www.Paylesstax.com's Favorite Continuing Professional Education Links
 
Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357www.Paylesstax.com's Favorite Library Links
 
Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357www.Paylesstax.com's Favorite Internet Links
 
Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357www.Paylesstax.com's Favorite Internet Purchasing Links
 
Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357www.Paylesstax.com's Favorite Stock Market Links
 
Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357www.Paylesstax.com's Favorite Travel Links


Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357


Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357
Professional Fees


Student Loan Interest by Don Fitch CPA (877)CPA-Help or (877)272-4357