5. Investment Interest Expense
This is a more specialized deduction that applies to retirees who have investment portfolios and borrow money to invest. It is one of the few miscellaneous itemized deductions that survived recent tax law changes, making it a valuable but often overlooked tax write-off.
How It Works
If you take out a loan (often called a “margin loan” from your broker) and use that money to purchase investments like stocks or bonds that produce taxable income (like dividends and interest), you can deduct the interest you pay on that loan. This is known as investment interest expense.
The key rule is that you can only deduct investment interest up to the amount of your net investment income for the year. Your net investment income includes things like interest, non-qualified dividends, and capital gains, minus any other investment-related expenses.
For example, if you earned $5,000 in net investment income for the year and paid $6,000 in margin loan interest, you could only deduct $5,000 of that interest. The remaining $1,000 can typically be carried forward to deduct in a future year.
Why It Matters for Retirees
Many retirees rely on their investment portfolios for income. If you use margin as part of your investment strategy, failing to deduct this interest is like leaving free money on the table. You will need to itemize your deductions and use Form 4952, “Investment Interest Expense Deduction,” to calculate and claim this write-off.
