It’s tax season again, and a question we get from a number of clients after receiving their year end statements is, “Are my investment advisory fees tax deductible?” And the answer is an equivocal, “It depends.”
Congress did grant a tax deduction for certain investment expenses, but with anything to do with the tax code, the devil’s is in the details. Not to worry though, we’ll use this opportunity to settle the issue no matter your situation.
In general, the tax code allows for the deduction of expenses incurred in the production of income. With regards to investment income expenses, there are essentially two types:
Any expense incurred in the purchase or sale of a security, such a commission or a sales load on a mutual fund. These expenses are not tax deductible. Rather, they are applied against the cost basis in the purchase or sale of the security.
Expenses incurred in the production of income are tax deductible on line 23 of your Schedule A above the 2 percent of AGI threshold (investment expense deductions cannot be taken on the 1040 short form). Examples of expenses that can be deducted are:
- Investment advisory fees
- Maintenance fees
- Distribution fees
- Subscriptions for investment newsletters, magazines and services
- Investment or financial planning software or online services
- Depreciation on a computer used exclusively for managing investments
Contrary to what may be advertised, the cost of attending seminars, on land or on water, is not deductible. Also, expenses incurred in the production of income through tax exempt investments (municipal bonds) are not deductible.
There are two main requirements for taking a deduction for taking a tax deduction for investment expenses:
You must pay for the expense from your own pocket. Essentially, that means you have to write a check for the expense or from an account that you actually own such as an individual account or revocable trust account. This distinction is important because you don’t actually own your IRA. If you have fees and expenses deducted from your IRA balance, you are not allowed to deduct the expenses; but, you can if you write a check. Generally, you have to arrange with your custodian or advisor who manages your accounts for this option.
Expenses are only allowed if they are “ordinary and necessary” and the amount of the expense in relation to the income produced should be “reasonable and proximate.”
For many investors, investment advisory fees represent their biggest deductible investment expense, but all expenses related to generating investment income can quickly add up. So it would be important to ensure you realize the full benefit of all eligible deductions. Many custodians such as TD Ameritrade and Charles Schwab list investment advisory fees deducted by your financial advisor on tax Form 1099. You can contact us with questions on investment expenses and we can help you maximize your deductions. However, it is always advisable to seek the guidance of a qualified tax professional for final determination of what is and what isn’t tax deductible.