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OUR FAMILY OF
STRATEGIC TAX SERVICES

August 1, 2005

Before You Send Off Your Extended Tax Returns

#Tax Advisor, #2005 Archived
 

Note that the IRS has clarified its original instructions to Form 6251, for the 2004 tax year, which were incorrect in the original. The ruling clarifies that qualified housing interest, which generally is deductible for alternative minimum tax (AMT) purposes, includes interest paid on a mortgage that has been refinanced more than once to the extent the interest on the mortgage that was refinanced is qualified housing interest and the amount of the mortgage indebtedness is not increased.

For those taxpayers whose investment expense may exceed their investment income, noncorporate taxpayers may elect to treat qualified dividend income as investment income for purposes of calculating the deduction for investment interest.

In general the amount of investment interest that may be deducted in any tax year by a noncorporate taxpayer generally is limited to his "net investment income" for the year.

  • In addition, net investment income does not include "qualified dividends," i.e., dividends that are taxed at a top rate of 5% or 15%. However, a taxpayer may choose under Code Sec. 163(d)(4)(B) to treat qualified dividends as investment income for purposes of the investment income deduction. If the election is made, the qualified dividends are not taxed at the preferential 5% or 15% rates. Rather, they are taxed as ordinary income but may be offset by investment interest.
  • Once made, the election is revocable only with IRS consent. The election for qualified dividends applies to tax years beginning after 2002 and before 2009.
 
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