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Why you might forgo capital gains rate

by on
in Small Business Tax,Small Business Tax Deduction Strategies

Q. My friend insists he’s better off passing up the capital gains rate for bigger deductions. Is that possible? R.N., Pawtucket, R.I.

A. Yes. Your friend is likely referring to a special election for investment interest expense. The deduction is limited to the amount of your net investment income for the year. But you can choose to have capital gain income (e.g., gains from securities sales) count as net investment income. In that case, you forfeit the lower tax rate on long-term capital gains in exchange for a bigger investment interest expense deduction. Figure things out both ways.  

Tip: You can make the tax return election for all of your gains or only certain selected gains.

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