If you borrow money from your broker to buy stocks, you’ll have a greater chance of coming out ahead if you can deduct the interest you pay on the loan. To support this deduction:
* Use the borrowed money only to buy securities. If you use the proceeds to buy furniture, pay heating bills, etc., the interest won’t be deductible.
* Make sure you have enough “net investment income” to fully offset the margin loan interest you pay. Net investment income includes interest and short-term capital gains but you can elect to include qualified dividends and long-term capital gains, too, if necessary to take the full deduction.
* Reduce your holdings of tax-exempt bonds. Margin interest isn’t deductible if it’s used to "purchase or carry" municipal bonds or bond funds.
