A client asked me yesterday if investment management fees are tax deductible (advisory fees for portfolio management). The short answer is a qualified “yes,” subject to certain limitations.
First, some background….
In the case of individuals and couples, the US tax code allows a deduction for “all the ordinary and necessary expenses paid or incurred during the taxable year
- for the production or collection of income
- for the management, conservation, or maintenance of property held for the production of income, or
- in connection with the determination, collection, or refund of any tax.”
Generally speaking, a tax deduction may be available for tax preparation, income tax and estate tax advice, ongoing portfolio management, investment advice, and attorney or accountant fees to collect taxable income.
A tax deduction is not available for general financial planning, drafting of estate documents, indirect management expenses of mutual funds you own, and similar expenses.
So advisory fees for portfolio management are typically tax deductible with the following caveats:
1. Fees are paid with “after-tax money.”
In other words, you must pay the fees directly (check, credit card) or have them billed directly to your after-tax investment account. Fees paid from your IRA or qualified retirement plan are not deductible—you already have tax deferral in those accounts and Uncle Sam is not going to let you double-dip.
2. Only for itemizers.
Fees are claimed as a Miscellaneous Deduction on line 23 of federal Schedule A, which means that only taxpayers who itemize their deductions can claim.
3. Pro-rate fees for tax-free income.
If the fees involve the production of tax-free income, then you must pro-rate the deduction. For example, if a taxpayer’s investment “income” was 60% taxable and 40% tax-free municipal bond interest, then arguably only 60% of the advisory fees would be claimable.
4. The 2% limitation.
Finally, all eligible Miscellaneous Deductions are grouped together on Schedule A. As a group, only total expenses greater than 2% of your Adjusted Gross Income are deductible. For example, if your AGI is $80,000 and total Miscellaneous Deductions are $3,000, only $1,400 is deductible on Schedule A: $3,000 minus $1,600 ($80,000 x .02) = $1,400.
Want to make your IRA investment advisory fees deductible? If you have surplus cash flow or an after-tax account, pay for the IRA management fees from one of those sources. Note though, it typically wouldn’t make sense to take an IRA distribution specifically to have the resources to pay the fees from outside the IRA account.
There are many nuances and everybody’s situation is different. Treat this as general information and be sure to consult your own tax professional for any advice specific to your situation.
This article was originally published here.
Larry McClanahan, CFP®, ChFC, EA is the principal of SecondHalf Planning & Investment, LLC, a registered investment advisor dedicated to helping you successfully navigate your retirement transition and enjoy a purposeful and fulfilling life of financial independence.
Contact Larry: (503-698-5680) larry