“Are my investment advisory fees tax deductible?”
Every year a handful of clients ask this question, and the answer is a definitive, “It depends.” Congress has granted a tax deduction for certain investment expenses, but let's take a minute to sift through the fine print.
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. Pretend you buy a stock for $100 with a $5 commission - your cost basis for tax reporting is now $105.
- Examples of expenses that can potentially 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 expenses or the fees must come directly from an account that you actually own. This distinction is important because you don’t actually own your IRA. As such, fees and expenses deducted from your IRA are not tax-deductible, but you could deduct the fees if you paid your advisor with a check. Generally, you have to arrange with your custodian for this option ahead of time.
- 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. Although this article may help you get started, we would suggest you seek the guidance of a qualified tax professional for final determination of what is and what isn’t tax deductible.