Form 4952 - Explanation Please

[Yardley CPA]

I have a client who received the following:

 

K-1 from Partnership:

  -  Net Long Term Capital Loss  -7

  -  Other income ©  -1

  -  Other Deductions (k) 2

  -  Other Information (b)2

 

Interest Income  106

 

Ordinary Dividends   1,805

Qualified Dividends   1,696

 

 

ATX includes form 4952 and also includes a warning in yellow that  "Form will not be included in efile.  Per IRS efile spec, either Investment expense, carryover or deduction must be present"

 

I have never completed form 4952 before.  In looking at it, there is a fillable line g "enter the amount from lines 4b ($1,696) or 4e ($930 which is the Net Gain from the disposition of property held for investment) that you elect to include in investment income. 

 

Can someone please give me a summary of this form and it's purpose and what maybe the right move in this case?

 

Thanks very much!

Edited March 18, 2015 by Yardley CPA

[jklcpa]

The deduction for investment interest expense is limited to investment income.  Investment income generally is interest and dividend income, and any cap gain that the taxpayer elects to be treated as investment income.  If your client didn't pay any investment interest expense or have any carryover of that type of expense, then form 4952 is not necessary. Keep in mind that any cap gain income that the taxpayer elects to treat as investment income will be taxed at ordinary rates (in other words, the TP is electing to forego the cap gain rate on this amount of income he/she elects to treat as investment income).  Your program is including form 4952 because of the K-1 input that is reporting investment income. 

 

I have a good example that I just worked on this afternoon.  The taxpayer and his wife had a beach condo held as an investment and it had a mortgage on it. That portion of the mortgage interest was investment interest expense, and it was never deducted on any year's return because they only had tiny little amounts of interest and dividend income each year, so they've had a carryover of investment interest expense of about $11K each year on form 4952.  They sold the property in 2014 and now have a capital gain on it.  They will elect to treat $11K of the gain as investment income and pay ordinary tax rate on that portion of the gain (foregoing the cap gain rate) so that they will be finally be allowed to deduct the expense that has been carrying over.  Even though they are paying ordinary rate instead of cap gain rate, they are saving about $3300 in tax because of the deduction being allowed that ultimately flows to Schedule A as an itemized deduction.