See below for answers to frequently asked questions about Form 4952, the Investment Interest Expense Deduction.
Reporting investment interest expense on Form 4952:
- Go to Screen 25, Itemized Deductions.
- Scroll down to the Interest section.
- Hold down Ctrl + E in, Investment Interest.
- Enter a Description and Amount, and then select OK.
- Additional inputs can be found on Screen 28, Investment Interest (4952).
- Investment interest from a Passthrough K-1 should be entered on Screen 20, Passthrough K-1s.
Lacerte carries these amounts to Form 4952. When investment interest exceeds net investment income, the program includes the deductible portion on Schedule A. If the investment interest is fully deductible, the Form 4952 will not generate and the deduction will flow to Schedule A, line 9.
How is Form 4952, line 4G calculated?
The program currently does not provide a worksheet for this calculation. A diagnostic is provided by the program to explain the result of the calculation and why the program has optimized the result. The program then takes the amount from lines 4b or 4e that is necessary to give the taxpayer the full deduction (line 8).
Per Form 4952, line 4g,
"Enter the amount from lines 4b and 4e that you elect to include in investment income."
The Taxpayer has $60,000 in investment interest expense. The total investment expense is $14,233 (this amount is calculated from the Schedule A, line 27 (Individual)). The program then calculates line 4g to be $57,733.
Line 4g Calculation:
- Add lines 5 and 6 ( 60,000 + 14,233 = 74,233), this should be the amount on line 4h, Investment Income.
- Subtract line 4h from the amount on line 4c (74,233 - 16,500 = 57,733).
In this example, the amount on line 4g is $57,733. It's the amount necessary to take the full investment expense deduction, line 8.
How is the investment expenses adjustment on the worksheet for Form 4952, line 5, calculated?
Information regarding this calculation is available using the F1 help on Screen 20.1, Partnership Information, in the Line 20 - Other section, in the field labeled (20B) Investment expenses:
Enter the amount of investment expenses reported on line 20b. The program automatically includes "Portfolio Deductions (Other)" on line 5 of Form 4952, Investment Expense. If the amount entered in 20B - Investment Expenses (Screen 20.1, code 857) differs from the amount entered in Portfolio Deductions(Other), then line 5 of Form 4952 is adjusted by the difference.
Elect to include capital gains in the investment interest expense calculation:
Lacerte automatically optimizes this election: it determines whether to include Capital Gains and Qualified Dividends as Investment income, based on which choice results in lower regular tax. Its method is described in F1 help on the override field Capital gain and qualified dividends to include in investment income[O] on Screen 28, Investment Interest (4952).
Automatic Optimization doesn't take AMT into account. On returns subject to AMT, manual adjustment of the elected amounts may result in lower total tax liability.
The automatic calculations can be affected by input on Screen 28, Investment Interest (4952).
- To increase or decrease the amount of Capital Gain/Qualified Dividends to include, make an adjustment to Form 4952, line 4d on Net gain on disposition [A].
- By default, Capital Gains are utilized before Qualified Dividends. To utilize Qualified Dividends first, check the box Elect qualified dividends before capital gains.
- To override the total amount of Qualified Dividends/Capital Gains utilized (Form 4952 Line 4g), use Capital gain and qualified dividends to include in investment income [O].
The program calculates Investment Income, Expenses, and Capital Gains and Qualified Dividends from entries throughout the program. The program uses Capital Gains in full from Schedule D property dispositions.
For purposes of determining the amount of Capital Gain and Qualified Dividends to elect to include in investment income, the program performs two tests. The first test includes no Capital Gain and Qualified Dividends on line 4g of Form 4952. The second test includes all Capital Gain and Qualified Dividends on line 4g, but only up to the amount that would be needed to free up all of the Investment Interest expense. Form 4952 is generated based on the test that results in the lowest regular tax.