Investment Tax Deductions You May Have Overlooked
The U.S. tax code once provided for a number of investment-related tax deductions that could lower your overall tax burden. Unfortunately, that’s not the case any longer. These were miscellaneous itemized deductions which were eliminated by the Tax Cuts and Jobs Act (TCJA) beginning in Jan. 2018.
There may be a silver lining here, however. The TCJA is due to expire at the end of 2025 unless Congress acts to breathe new legislative life into it. It’s possible that these miscellaneous itemized deductions with be available again in 2026. You also have two to three years to file an amended return if you could have claimed these deductions in previous years but failed to do so.
The Deduction for Investment Advisory Fees
You can’t deduct the commissions you pay to your stockbroker on trades executed in your brokerage account. Commissions are added to the cost basis of your tax lot positions and are eventually used to calculate any applicable capital gains or capital losses on which you will pay taxes or potentially receive a tax deduction.
But there are some fees, expenses, and other advisory charges on which you might be able to take an investment tax deduction depending upon the circumstances including how large of an expense they represent to your taxable or adjusted gross income.
For example, you might work with a registered investment advisor. Many registered investment advisors operate on a fee-only basis. Unlike other financial institutions or professionals, they don't make money for referring you to certain financial products, nor do they generate any revenue from executing trades on your behalf.
Instead, they charge you investment advisory fees, often a percentage of assets under management, flat fees, or hourly fees. It can depend on the firm with which you’re working, your specific needs, and the nature of the services you’re being offered.
Fees typically average about 1.02% annually on accounts in the $1 million range. The average is .99%. The rules for writing off investment advisory fees and asset management fees in taxable accounts come down to this:
- Investment advisory fees are tax-deductible only on portions that exceed 2% of your adjusted gross income (AGI). You would write them off by listing them on Schedule A under "Interest You Paid", using Form 4952.
- Investment advisory fees are considered a tax preference item as defined in the calculation of the Alternative Minimum Tax (AMT). A portion or the entirety of your investment advisory fee deduction will be disallowed if you’re subject to the AMT, so you would not be able to take advantage of the write-off.
There isn't an agreement among professionals about whether you can take the investment advisory fee tax deduction for non-taxable accounts, such as Roth IRAs or Rollover IRAs. You can try, but there’s no telling whether it will be accepted, and you could be opening yourself up to an audit.
One technique used by some wealth managers and asset management companies is to allow their clients to pay the advisory fees from outside the tax-free or tax-deferred account by deducting all the fees from a brokerage account or billing the client directly and having the client write a check.
The Deduction for Accounting Fees
The fees you pay for tax preparation are miscellaneous deductions. Unfortunately, a lot of households can’t avail themselves of the deduction because the rules are the same as for the investment advisory fee tax deduction—only those fees in excess of 2% of your adjusted gross income are deductible.
Your Wall Street Journal Subscription Could Be a Deductible
Can’t live without your daily Wall Street Journal? How about Fortune, Forbes, or The Financial Times? Keep your receipts and you might be eligible to take the same tax deduction we've been discussing. Any amount over 2 percent of your adjusted gross income can be claimed as a deduction, and it’s the total of all your miscellaneous deductions that must surpass that 2%. It’s not each individual expense.
Deduction for Some Legal Fees
These entities are ordinarily pass-through, so investors receive a K-1 statement and their share of the allocated tax deduction. Legal fees of this nature are usually fully tax deductible, and they’re not subject to the Alternative Minimum Tax.
Whether or not you can deduct other legal fees from your taxes varies depending upon the circumstances and situation. It can get really messy quickly so it's best to speak with a qualified accountant.
Legal fees from a tax attorney to help you mitigate your tax burden or do tax planning are usually fully deductible.
Safe Deposit Box Rental Cost Deductibles
Do you actually store your investments in physical forms, such as paper stock certificates or savings bonds? You can probably deduct it as an expense on your taxes if you keep a safe deposit box at a local bank to protect your securities.
The Deduction for Interest Expense Tied to Investing Activities
The IRS allows a deduction for investment interest expenses, which includes any margin interest expense you pay for money borrowed to purchase investments such as stocks and bonds. There are very, very strict rules for this particular investment tax deduction, however. For one, you can only deduct investment interest expense up to the limit of your “net investment interest.”
This includes non-qualified dividends and capital gains. You can include qualified dividends that pay only the lower dividend tax rates originally established during the Bush tax cuts, but then you’d give up their special qualified status. You would have to pay your regular tax rate on them in any amount exceeding your margin interest expense.
You must also deduct any investment expenses such as those we’ve already discussed. The result—your net investment income—is the maximum amount of margin interest expense you can write off your taxes. In some cases, you might be able to carry forward your investment interest expense deduction if you can't fully take advantage of it in a single year.
As with everything else in this article, you need to Consult with your CPA or another qualified professional tax representative to help you calculate and understand your options based on your unique circumstances, opportunities, situation, and other relevant factors.
CALLOUT: IMPORTANT: These deductions and their qualifying rules were only available through Dec. 2017. You cannot claim these deductions on your 2018 tax return.