1040-US: Calculation of Form 4952, line 5

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Question

Sometimes the client's investment expenses are reported in total on Form 4952, line 5, sometimes the amount is reduced, and often there is no amount reported. How does the amount of investment expenses reported on Form 4952, line 5 calculate?

Answer

Investment expenses are allowed deductions, other than interest expense, directly connected with the production of investment income. The tax application compares the amount of the investment expenses on Schedule A (Form 1040), line 23, with the total allowed miscellaneous expenses on Schedule A (Form 1040), line 27. The smaller of (a) the investment expenses allowed on line 23, or (b) line 27, is included as investment expenses. If you have investment expenses reported on line 23, but line 27 is zero, no amounts are reported on Form 4952, line 5. Investment expenses allowed on Schedule A (Form 1040), line 28, are also included on Form 4952, line 5. The tax application uses Schedule A, line 27 and 28 amounts after applying any itemized deduction limitation due to high AGI. The 4952 Investment Income Worksheet 2 details how Form 4952, line 5 calculates.

Amounts entered in the Investment expenses field in Screen K1-6 are used in the line 5 calculation. Form 1065, Schedule K1, line 20B (Form 1120S, Schedule K1, line 17B) instructs preparers to enter amounts on Form 4952, line 5. To correctly calculate line 5 investment expenses, enter amounts in both fields, if applicable.

Related topic: Investment income and expenses FAQs (1040)

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