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Dear Tax Talk,
Can disallowed investment interest expenses from a deceased taxpayer be carried forward by the spouse next year, or it is lost when a taxpayer dies? — Matt
Dear Matt,
Interest borrowed for purposes of making investments that are not rental activities is considered investment interest expense, or IIE. Interest paid on a margin account is a typical example. Investment interest expense is deductible only to the extent of investment income. Any IIE in excess of this limit is carried forward to a future year to be offset against investment income in that year.
Investment income is typically interest, dividends (but not qualified dividends taxed at the lower rate) and short-term capital gains. Qualified dividends and long-term capital gains can be treated as investment income if the taxpayer elects to forgo their preferential tax rate. Form 4952 is used to report investment interest expense.
Usually a married couple figures their income and deductions jointly. If the investment interest arose from a joint account, then it is equally each spouse’s loss. The surviving spouse can only carry forward the portion that arose from joint ownership (one-half) plus that IIE from the surviving spouse’s separate property. The IIE of the decedent spouse is not eligible for carry-over. In lieu of the carry-over, the decedent’s assets are stepped up to date of death value, except for deaths in 2010, under certain limited circumstances.
Ask the adviser
To ask a question on Tax Talk, go to the “Ask the Experts” page and select “Taxes” as the topic. Read more Tax Talk columns.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.
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