Are Financial Advisory Fees Tax Deductible? (Updated May 2018)Submitted by 4th Generation Financial on June 4th, 2018
Are Financial Advisory Fees Tax Deductible?
The miscellaneous itemized deduction is gone, but effective tax breaks remain.
Provided by Kent McKee
Before 2018, you could partly or fully deduct investment advisory fees on your federal income tax return. When the Tax Cuts and Jobs Act was passed, however, the miscellaneous itemized deduction for investment fees and expenses vanished.1
This deduction seldom mattered for taxpayers in the highest brackets, as they could only deduct miscellaneous items on Schedule A once those expenses exceeded 2% of their adjusted gross incomes. Other investors took advantage of it; some, frequently.1
Are there any tax breaks relating to investment fees left? Sort of. While they are not formal tax deductions, they are certainly worth noting.
If you own a traditional IRA, you may effectively arrange a tax break. You can elect to pay the account fees right out of the IRA’s balance. In doing so, you are essentially giving yourself a tax deduction because you are paying the IRA fees with pre-tax dollars. (As a Roth IRA is funded with post-tax dollars, it makes no sense to pay Roth IRA account fees out of a Roth IRA balance.)1
Commissions linked to investment trades also basically constitute a deduction. A commission on an investment transaction effectively decreases an investor’s taxable gain – or alternately, increases an investor’s loss.1
Itemized deductions may still be claimed for fees paid for certain financial services. According to Internal Revenue Code Section 212, you are permitted to deduct expenses not associated with a business provided they directly relate to the production of income.2
What expenses meet this definition? Investment management fees charged to you by a Registered Investment Advisor (RIA). Tax preparation fees. Also, tax planning that is linked directly to the calculation or collection of a tax (whether in an income tax planning or estate planning context).2
How about financial planning fees or fees that financial professionals charge for per-project or hourly consulting? Unfortunately, none of these fees are directly connected to income production or investment transactions, so nothing like a deduction can be derived from these expenses.1
This is the reality through 2025. At that date, things may change, as the suspension of miscellaneous deductions under the Tax Cuts and Jobs Act may end. In the present, taxpayers have far less ability to deduct expenses linked to investing, asset management, and tax and financial planning.2
Kent McKee may be reached at 407-677-7107 or firstname.lastname@example.org.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 - financial-planning.com/news/the-new-tax-laws-impact-on-investment-advisory-fees-iras [5/4/18]
2 - kitces.com/blog/tax-deduction-financial-advisor-fees-commissions-ira-taxable-section-212-expense-tcja/ [3/7/18]