Author Topic: Trying to Understand Taxes on Interest  (Read 2563 times)

rjslarx1209

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Trying to Understand Taxes on Interest
« on: March 11, 2017, 11:43:52 AM »
For 2016 I've got interest of over $28k and losses from charged off loans of almost $18k.  Does this mean I pay taxes at my current 28% income tax bracket and then have to charge off the losses as a capital loss?   Does this mean that we can't simply deduct the losses from charged off loans from interest and pay taxes on the balance? 

storm

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Re: Trying to Understand Taxes on Interest
« Reply #1 on: March 11, 2017, 01:59:41 PM »
Yes, the interest earned is treated like regular income and will be taxed at your effective tax rate.  Losses are treated as capital losses.  Unless you have gains to offset, you can only deduct up to $3,000 a year, but you can carry the remaining loss over to the next year.

SLCPaladin

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Re: Trying to Understand Taxes on Interest
« Reply #2 on: March 12, 2017, 12:18:45 PM »
The dilemma you've highlighted is one of the reasons that I've gradually been shifting to higher quality notes, specifically A and B grade. If your account is not in an IRA, then the tax implications for investing in lower grade notes can have a fairly pronounced effect of reducing your after-tax return. I wish the tax situation worked as you described (subtract charge-offs from interest and pay tax on the net increase), but alas it is not.

MarinBB

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Re: Trying to Understand Taxes on Interest
« Reply #3 on: March 13, 2017, 08:54:16 AM »
From IRS Publication 550 p.57 (https://www.irs.gov/pub/irs-pdf/p550.pdf): "If someone owes you money that you cannot collect, you have a bad debt. You may be able to deduct the amount owed to you when you figure your tax for the year the debt becomes worthless.

There are two kinds of bad debts—business and nonbusiness. A business bad debt, generally, is one that comes from operating your trade or business and is deductible as a business loss. All other bad debts are nonbusiness bad debts and are deductible as short-term capital losses."

Has anyone considered making the argument that lending through LC/Prosper is a "business" so that one can offset interest income with losses?



bluto

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Re: Trying to Understand Taxes on Interest
« Reply #4 on: March 13, 2017, 12:22:57 PM »
I would expect it's like the professional trader status (allowing mark to market rules for gains and losses) where it's quite difficult to show, because many investors would like to get it.