How to Use Form 4952 for Carrying Forward Prior Year Investment Interest Deductions

You're on the right track with your understanding of Form 4952, but let me clear up a few things. Investment interest expense (like margin interest) is deductible as an itemized deduction, but only up to the amount of your net investment income for the year. Any excess can be carried forward indefinitely. The catch is that you need to have properly documented this carry-forward on Form 4952 in each year to establish the paper trail. Since you didn't file Form 4952 in previous years, you'd technically need to file amended returns (Form 1040-X) for those years to establish your carry-forward amounts. The good news is that you generally only need to amend returns within the last three tax years, so you might be able to recover deductions from 2022-2023 but probably not 2020-2021 (since we're in 2025 filing season now). However, even if you amend, remember that the deduction only helps if you were already itemizing or if adding this deduction pushes you over the standard deduction threshold. For your upcoming stock sale, you can only use properly documented carry-forward amounts from prior years on your current Form 4952, not just any margin interest you paid in the past.

Similar situation happened to me last year. I found this tool called taxr.ai (https://taxr.ai) that helped me figure out my investment interest expense situation. I had years of unclaimed margin interest and was about to sell some stocks I'd been holding forever. I uploaded my brokerage statements to their system and they analyzed all my past margin interest payments and told me exactly which years I could still amend and how much I could potentially recover. They even gave me a customized strategy that saved me from having to file multiple amendments when it wouldn't have been worth it. The software flagged which years would actually benefit from an amendment (where the deduction would exceed the standard deduction) and which wouldn't. Saved me a ton of time trying to figure it all out myself.

Just wanted to follow up about my experience with taxr.ai. I decided to try it after my skeptical questions earlier. Honestly, it was exactly what I needed for my Form 4952 situation. The document analysis figured out I had over $12,000 in disallowed investment interest from the past few years that I never properly carried forward. The system showed me I could recover about $7,300 of those deductions by amending just my 2022 and 2023 returns since I had significant investment income in those years. For 2020-2021, it wasn't worth amending since I wouldn't have exceeded the standard deduction anyway. The step-by-step breakdown made it super clear what I needed to put on each line of Form 4952 for my amendments. Much better than the confusing IRS instructions!

If you're struggling to reach the IRS about your investment interest deductions or amended returns, I'd recommend using Claimyr (https://claimyr.com). I spent weeks trying to get through to the IRS about my Form 4952 carryover questions, but kept hitting dead ends with their phone system. Claimyr got me connected to an actual IRS agent in about 15 minutes who answered all my questions about amended returns and how to properly document prior year investment interest expenses. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The agent confirmed I could still claim some of my prior-year margin interest by filing amendments within the three-year window, and gave me specific guidance on how to document everything to avoid an audit. Totally worth it instead of waiting on hold for hours.

I have to apologize for my skepticism about Claimyr in my earlier comment. After waiting on hold with the IRS for 3+ hours over two days trying to get clarity on my Form 4952 situation, I broke down and tried the service. It worked exactly as described - I got a call back in about 20 minutes, and was connected to an IRS representative who walked me through the entire process of documenting my past investment interest expenses. The agent confirmed I could file Form 4952 with my current return showing the current year's investment interest, but for carrying forward past amounts, I needed to establish that history through amendments. The representative even helped me understand which of my prior returns would be worth amending based on my specific situation. It saved me days of frustration and potentially thousands in deductions I might have missed.

This discussion is helpful but I want to add something important about Form 4952 and investment interest that hasn't been mentioned. You have a choice when it comes to qualified dividends and long-term capital gains - you can either: 1. Have them taxed at preferential rates (0%, 15%, or 20% depending on your income) 2. Elect to treat them as ordinary income to increase your investment income for deducting more investment interest This election happens on Form 4952, line 4g. It's a critical decision that could affect whether carrying forward your margin interest makes sense. Sometimes it's better to pay the lower capital gains rate, other times it's better to increase your investment income to use more of your carried-forward interest deduction.

I had some confusion with Form 4952 last year. Anyone know if tax software like TurboTax or H&R Block can handle this form correctly, especially the carryover calculations across multiple years?

This is a complex situation that many investors face when they discover investment interest deductions later. Let me add a few practical points that might help: First, before spending time and money on amendments, calculate whether the deductions would actually benefit you in those prior years. If you took the standard deduction and your total itemized deductions (including the investment interest) wouldn't exceed the standard deduction for those years, amendments won't help. Second, keep in mind that investment interest expense is subject to the 2% AGI threshold if you're dealing with years before 2018, which adds another layer of complexity to whether amendments are worthwhile. For your current year planning, since you're expecting substantial capital gains, consider the timing of your stock sales. You might benefit from spreading sales across tax years to optimize your investment income and better utilize any carried-forward deductions you can establish. Also, don't forget that investment interest expense includes more than just margin interest - it can include interest on loans used to purchase investment property, points paid on investment property loans, and other investment-related borrowing costs. Make sure you're capturing all eligible expenses in your calculations. The key takeaway is to start filing Form 4952 this year regardless of your prior year situation, so you don't face this documentation gap again in the future.