Investment Tax Deductions You May Have Overlooked

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The U.S. tax code once provided for a number of investment-related tax deductions; these could help lower your overall tax burden. However, this is no longer the case. These miscellaneous itemized deductions were eliminated by the Tax Cuts and Jobs Act (TCJA) starting in 2018.

But there may be a silver lining here. The TCJA is due to expire at the end of 2025. That's unless Congress acts to breathe new legislative life into it. It’s possible that these 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.

Learn more about these deductions you may have missed at the time.

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. They are used to calculate any 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 charges on which you might be able to take an investment tax deduction. It depends on the circumstances. This includes how large of an expense they represent to your taxable or adjusted gross income.

For instance, you might work with a registered investment advisor. Many advisors work on a fee-only basis. Unlike other financial institutions or professionals, they don't make money for referring you to certain financial products. They also don't earn any money from making trades on your behalf.

Instead, they charge you investment advisory fees. This is 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 most often average about 1.02% per year on accounts in the $1 million range. The average is .95%. The rules for writing off 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 advisory fee deduction will be disallowed if you’re subject to the AMT. That means you would not be able to take advantage of the write-off.

Professionals don't agree about whether you can take this 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. This is done by deducting all the fees from a brokerage account. Or, they can bill the client directly and have the client write a check.

Accounting Fees

The fees you pay for tax preparation are miscellaneous deductions.

Unfortunately, a lot of households can’t avail themselves of the deduction. That's 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 Forbes Subscription

Can’t live without your daily Wall Street Journal? How about FortuneForbes, or The Financial Times? Keep your receipts: You might be eligible to take the same tax deduction mentioned above.

Any amount over 2% 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.

Some Legal Fees

Legal fees are often fully tax-deductible for businesses. This includes those incurred as part of starting or running a limited liability company, limited partnership, or other entity.

These entities are ordinarily pass-through. Investors will 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 AMT.

Note

A pass-through business means that the taxes aren't paid by the business. Instead, they are paid by the owner when they report business income. Many small businesses are pass-through.

Whether or not you can deduct other legal fees from your taxes varies. It just depends on your circumstances. It can get really messy quickly, so it may be best to speak with a qualified accountant.

Legal fees from a tax attorney to help with tax planning are usually fully deductible. 

Safe Deposit Box Rental Costs

Do you store your investments in physical forms? These could include items such as paper stock certificates or savings bonds.

Chances are, you can deduct the expense on your taxes if you keep a safe deposit box at a local bank.

Interest Expense Tied to Investing Activities

The IRS allows a deduction for investment interest expenses. This includes any margin interest expense you pay for money borrowed to purchase investments such as stocks and bonds. But there are very, very strict rules for this particular deduction. 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 established during the Bush tax cuts. But keep in mind that you'd then be giving up their special qualified status. You would have to pay your regular tax rate on them in any amount above 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 tax professional to help you understand your options. It's all based on your unique circumstances, opportunities, situation, and other relevant factors.

Important

These deductions and their qualifying rules were only available through the end of 2017. You cannot claim these deductions on tax returns for the year 2018 and after.