Election to Treat QDIVs & LTCGs as Investment Income for Investment Interest Expense

[Java_and_Jazz]

An election is available to treat qualified dividends and long-term capital gains as investment income for purposes of the Investment Interest Expense Deduction on Form 4952. The amount of qualified dividends and long-term capital gains to be included in investment income is entered on Form 4952, Line 4g.

The amount on Form 4952. Line 4g is not eligible for the favorable qualified dividend and long-term capital gains tax rates. In tax years 2019 and earlier, it was excluded on Line 5 of the Qualified Dividends and Capital Gain Tax Worksheet. For tax year 2020, this line does not appear on the 2020 Qualified Dividends and Capital Gain Tax Worksheet. Can someone help me understand why this is the case? Was there is change in the tax law as a result of all of the legislation Congress passed in 2020 that changed the election?

[Catmom]

I don't know if there's been a tax law change on this, but I have the same problem. When I calculated the tax on the Schedule D tax worksheet that's in the Schedule D instructions, it's way different.  ProSeries is allowing capital gains treatment on the investment interest election amount.

[Java_and_Jazz]

Hi Catmom,

After researching this issue, I am convinced that if you elect to treat qualified dividends and/or LTCGs as investment income on Form 4952, the IRS instructions for 2020 tell you to calculate the tax on the Schedule D Tax Worksheet, not on the Qualified Dividends & Capital Gains Tax Worksheet (as in earlier years (before 2020)). As a result, I believe there is a software error in ProSeries so that the software does not use the Schedule D Tax Worksheet. I reported this to Intuit on Thursday 3/11/21. The representative entered a "repair ticket" into their system for the software developers to address the problem. I have not received any communication since Thursday evening and the software is still calculating the tax incorrectly. I will post a message if and when the error is fixed.

In the meantime, I was told to override the tax calculation by going to Schedule D, Line 20, and override the program by putting an "X" in the "No" box. This will force the program to calculate the tax using the Schedule D Tax Worksheet. It is the "brute force" method to get to the correct tax calculation. Not elegant, but it works.

[Catmom]

Hi Java_and_Jazz,

Thanks for your reply.  I posted this question in the ProSeries Facebook group and got no response at all. I also noticed where someone posted the same question on this forum a week ago and got no response. Or was that you?  Anyway, I checked the box "No" on Schedule D, line 20 like you said.  That works, but it also confirms that there is no advantage in taking the election at all (in my client's case) so I just deleted the election amount on the 4952.  I'll just carry it over again. Maybe some day he'll have investment income that doesn't qualify for QD or LTCG treatment. Thanks again, and thanks for reporting it to ProSeries!