Are Advisory Fees Tax Deductible?
The end of a calendar year often leads us to think about the upcoming tax season. A question I get from a number of clients after receiving their year-end statements is, “Are my investment advisory fees tax deductible?” And the answer is, “It depends.”
Congress granted a tax deduction for certain investment expenses, but as 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% of AGI threshold (investment expense deductions cannot be taken on the 1040 short form). Examples of expenses that can be deducted are:
- Financial planning fees
- 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 (like municipal bonds) are not deductible.
There are two main requirements 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. This distinction is very 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 for this option.
- Expenses are only allowed if they're “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's important that you fully take advantage of all eligible deductions. Our services include an audit of your investment expenses, and we can help you maximize your deductions. However, I always recommend that my clients seek the guidance of a qualified tax professional for final determination of what is and what isn’t tax deductible.
*This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2014 Advisor Websites.