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I am helping my family members (they live in New Jersey, USA) with their income taxes and came across something I was not sure about. For filing federal income taxes, investment interest (for purposes here, only margin interest - for borrowing to buy shares of stocks - is relevant), which is defined here and related to Form 4952 (more info here), can be deducted against ordinary dividends (not qualified dividends).


However, I could not find any information about whether the same deduction could be applied at the state level. For New Jersey, the forms seem to suggest that a taxpayer must only report investment income (including dividends) with no mention at all of the possibility of deducting investment interest.


Is investment interest (i.e., margin interest), deductible against ordinary dividends (or any investment income for that matter) on state income taxes? (any relevant general information about state taxes would be an upvote, but relevant information specific to New Jersey state income taxes would be a "best/accepted answer")

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Yes NJ does differ from Federal and from my (somewhat limited) experience other states do also, as well as differing from each other -- but I am currently familiar with NJ.

'Above-the-line' deductions on Federal 1040 lines 23 through 35 do not apply in NJ except (so far) line 31 alimony/maintenance paid -- which was just repealed Federally by TCJA, and I don't know if NJ will follow suit. The ones with greatest effect are IRA and self-employed retirement plans other than 401k, which are not state deductible when contributed, but when distributed (or converted to Roth) the contribution portion is not state taxable whereas in most cases it is Federally.

Of Schedule A deductions, assuming a taxpayer itemizes:

  • NJ allows medical expenses over 2% AGI, more generous than the Federal floor currently 7.5% and increasing to 10% for non-elderly soon (was scheduled for 2017 but delayed to 2019 by TCJA) (except that own-and-family health insurance for self-employed is Federally deductible above-the-line with no floor, which is more generous).

  • NJ allows real-property taxes, and for non-homeowners allows 18% of rent as imputed property tax (which Federal does not), but does not allow home mortgage interest (and points etc) OR investment interest

  • NJ does not allow charitable donations, except only conservation easements on land (which does not apply to very many people, especially in a substantially urbanized state like NJ, although it does support the near-universal passion among NJ localities and civic organizations to preserve remaining 'green' space)

  • NJ does not allow casualty and theft losses which are normally deductible Federally over a 10% floor (and $100) -- although TCJA 'suspends' them Federally except declared disasters (for the next 8 years IINM)

  • NJ does not allow '2% floor' deductions (which TCJA also suspends Federally) and other miscellaneous deductions except NJ does allow gambling losses to be taken against gambling winnings -- and exempts state lottery prizes under $10k from tax in the first place

Relatedly, NJ does not apply lower rates to qualified dividends and long-term capital gains; all dividends and gains are taxed at normal rates. This involves different reporting as well: for Federal, short-term gain distributions from mutual funds are reported as (nonqualified) dividends on Schedule B and line 12, not as gains on Schedule D and line 13, but for NJ they are excluded from line 16 and instead included in Schedule B and line 18.

  • Very thorough...yes I noticed the different treatment of qualified vs ordinary divs NJ compared to federal...thank you for great answer – The One and Only ChemistryBlob Mar 5 '18 at 14:55

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