What to Know About Tax Deductions for Investment Advisory Fees
During tax season, investors look in closer detail regarding what items they can deduct from their Federal income taxes. This includes expenses related to their investments.
Among the more common questions is whether investors can deduct investment advisory fees they have paid during the year.
As of early 2021, investors can still no longer deduct those investment advisory fees, although the Investment Adviser Association has been calling for a return of that tax advantage as the federal government has been discussing different COVID-19 economic relief plans over the past year.
How the Tax Cuts and Jobs Act (TCJA) Changed Deduction Rules
The Tax Cuts and Jobs Act, which became law in December 2017, had an impact on what the IRS allows for various deductions for expenses related to investments that produce taxable income.
Before this law, taxpayers could deduct “miscellaneous itemized expenses.” That included financial advisory fees, including:
IRA custodial fees
Fees related to investment advice
Accounting costs needed to produce or collect taxable income from investments
Once the Tax Cuts and Jobs Acts passed, investors could no longer deduct miscellaneous investment-related expenses like advisory fees from their taxable income. That applied to the tax years 2018 to 2025. However, that may have a chance to change with potential new policies, especially as the federal government continues to craft more economic stimulus packages to try to offset some of the financial effects of the pandemic.
Deductions Still Available to Income Investors
While investors can no longer include investment advisory fees in their itemized tax
deductions, they do still have other deductions related to their investments that may be
able to count. Professional tax advisors can provide more specific assistance on how
investors can best take advantage of deductions available to them for their situation.
Interest Expenses Deduction
Investors itemizing deductions can consider an interest expense as one of the possible
ways they can reduce their taxable income. Interest expense is what you pay to borrow
money or buy taxable investments, such as margin loans for buying securities.
One thing to note: investors can not include interest expenses for assets that already have tax advantages, like municipal bonds.
You can only apply an itemized deduction for interest expense up to your net taxable income from investments for the tax year, which includes income from, for example, ordinary dividends. However, you can then carry over any remaining interest expenses to the following tax year.
Capital Losses Deduction
While investors aim to make money, sometimes their portfolios take losses, such as when the broader market suffers declines or for other specific reasons. In those cases, the capital losses can be used to offset capital gains.
You can include up to $3,000 in capital losses that exceed capital gains as an itemized deduction to reduce your taxable income. If you have more than $3,000 in losses, you can carry the excess losses to the following tax year.
Impact of Deductions Lost from TCJA
Prior to TCJA, not all investors were deducting advisory fees from their income taxes through the “miscellaneous itemized expenses” even if they did pay those fees during the tax year. So, the TCJA did not necessarily result in all investors having to pay more in taxes as each investor’s situation is different.
In addition, investors may have benefitted from other tax code changes that could have potentially reduced their tax bill in other ways. For example, they may have changed tax brackets or had new tax rates that may have off set potential losses from not being able to deduct investment advisory fees.
The Bottom Line
You may not be able to deduct investment advisory fees now, but it is possible that could change in the future. That is because laws on how investors can treat taxable income can change. So, you might want to consider keeping an eye on this issue in case the rules on deducting advisory fees change, and you can possibly reduce your tax bill.
Keep in mind that even as individual tax laws change, investors can keep a broad perspective to understand the total effects to their tax bill, and not just the impact of one law.
For now, investors do have several ways they can potentially itemize deductions on taxable income that might be worth exploring.
Infinity Financial Services is a national, independent Investment and Wealth Management firm, founded with a vision: help enterprising financial professionals to grow truly independent, successful practices, leveraging leading-edge technologies and firm support. Based in Oakland, California, with branch offices around the U.S., Infinity's financial professionals offer an array of asset management, brokerage, insurance, financial planning, benefit plan, insurance, and risk management services. This article provides information for investment professionals. It is not intended for use by the general public.