Booyah Breakdown: Taxing Questions

But know that you would then owe Social Security and Medicare taxes on your salary. However, it may be worth it to fund your retirement.

Could you please clarify the deductibility of interest paid on margin borrowings through your broker account? When is the interest expense deductible? Do you need to itemize deductions to take advantage of it? Does it offset other income, or can it be used to increase the cost basis of the stock purchased?

Margin interest is the interest your broker charges you when you borrow against your brokerage account.

But you can't add margin interest to the cost basis of the stock. Generally, it's treated as an investment expense. (Read Section 163 of the tax code if you want more grist.) But if you qualify as a trader in the eyes of the IRS, you can report your margin interest as a business expense on Schedule C.

For an investor, however, margin interest is an itemized deduction and generally is limited to the amount of investment income you have. Form 4952 -- Investment Interest Expense Deduction -- will help you determine just how much of that interest will be allowed as a deduction in the current year. Any unused interest can be carried forward to later years. (See Section 163(d)(2) of the tax code for more on that.)

If, as an investor, you decide to take the standard deduction in 2006, you cannot take a deduction for that margin interest this year. But a portion of that interest may be carried forward to future years.