Contributed by: Timothy Wyman, CFP®, JD
It’s that time of year again: it’s tax reporting season! Hopefully your 1099 statements have arrived and you have begun your annual tax gathering progress. A common question this time of year is, “Can I deduct investment management fees?” Like many areas of the US Tax Code, this can be anything but a straight forward answer. Your tax preparer is the best person to consult with on this issue – but in the meantime, here are some guidelines.
The first place to start when trying to determine if an investment management fee is deductible or not is to determine the type of account: Taxable, Traditional IRA, Roth IRA, 401k, etc.
Investment management fees paid in taxable accounts (such as single, joint or living trust accounts) are a tax deductible expense and reported as a miscellaneous itemized deduction on Schedule A of Form 1040. That’s the easy part – but not the whole story. There is more to the story because not everyone can actually benefit from miscellaneous itemized deductions. In order to benefit from your miscellaneous itemized deductions, in aggregate they must exceed 2% of your Adjusted Gross Income. As an example, if you have Adjusted Gross Income of $100,000, then the first $2,000 of miscellaneous itemized deductions are not deductible – only the balance or amount in excess of $2,000 can be deducted. To further confuse the issue, if you are subject to the Alternative Minimum Tax some or all of these deductions could be disallowed as a tax preference.
For accounts such as Traditional IRA’s, ROTH IRA’s, and 401k’s, it continues to be my interpretation of the tax code that investment management fees paid by assets in these accounts are not deductible; the positive trade off however is nor are they considered taxable income. So, the fees are not deductible but you don’t pay income on the fee either. That said, some professionals do interpret that the fee is deductible, just as it is for taxable accounts discussed above, if the fees are paid with money outside of the IRA. For example, some tax professionals will suggest that fees attributed to IRA type funds be paid via a separate check or billed to a taxable account making them deductible.
As you can see, there are some gray areas on this topic. What can you do?
Be sure to share the information about your paid investment management fees with your tax preparer.
Break the fees out by account type (taxable versus other types, such as an IRA).
Fortunately your yearend tax reports from your brokerage firm (such as Raymond James) should contain the necessary information on investment management fees for correct accounting. And, as always, if you need help getting through the maze give us a call.
Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a contributor to national media and publications such as Forbes and The Wall Street Journal and has appeared on Good Morning America Weekend Edition and WDIV Channel 4. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), mentored many CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James. Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS we are not qualified to render advice on tax or legal matters. You should discuss tax matters with the appropriate professional.