It surprises me how few questions I receive about the tax deductibility of Investment Advisory fees. I hope that your CPA asks this question as they prepare your tax return, but I fear that some people miss this potential tax deduction. As with many tax rules, this one has quite a number of caveats. Here are three things you need to know:
1. First, we need to distinguish between Investment Advisory Fees (also called Investment Management Fees), Financial Planning Fees, and Commissions. Only Investment Advisory Fees are tax deductible. If you are a client, note that the fees charged by Good Life Wealth Management are Investment Advisory Fees.
If you are with a different firm and pay up-front commissions on the purchase of a stock, mutual fund, etc., the commission is not tax deductible, but is an adjustment to your cost basis.
Financial Planning fees are not tax deductible. Some firms charge both an Investment Advisory fee, based on the size of the account, as well as a flat or hourly fee for financial planning each year. In this case, the investment advisory fee is tax deductible and the planning fee is not. Other firms only do planning, and not investment management, in which case none of their financial planning fee would be deductible.
2. Investment Advisory Fees are deductible on Schedule A as part of “Job Expenses and Certain Miscellaneous Expenses”, on line 23. This section also includes unreimbursed employee expenses and tax preparation fees. Only expenses which exceed 2% of AGI (Adjusted Gross Income) are tax deductible; if these combined amounts are below 2%, none are deductible. Obviously, you have to itemize your deductions and forgo the standard deduction to be able to deduct Investment Advisory Fees.
3. On IRAs: Fees paid directly from an IRA are not tax-deductible. However, paying fees out of a Traditional IRA may still be beneficial, because you are paying this expense with pre-tax money, which is always preferable to paying with after-tax money.
For a Roth IRA, we prefer to pay the fee with outside funds, such as from a taxable account. That’s because if you pay an IRA fee with outside money, the expense will be deductible. For our clients who hold both Roth and taxable accounts, we do suggest billing the Roth fee to your taxable account.
Please note that while it is acceptable to pay an IRA fee with taxable money, you can never charge fees to an IRA other than the exact fee for that specific account. Otherwise, the fee will be considered a distribution, subject to tax and penalty.
This information is for educational purposes only and should not be construed as individual tax advice. Please contact your CPA or tax preparer to confirm your personal eligibility.