If you have investments, such as stocks or mutual funds, you might be missing out on a commonly overlooked tax deduction. When you itemize, you can add investment fees and expenses to your miscellaneous deductions down at the bottom of Schedule A (line 23).
You can only deduct miscellaneous expenses that are in excess of 2% of your adjusted gross income (AGI), but there are several other items that get lumped in with that, such as unreimbursed employee expenses, tax preparation fees, educator expenses, losses from casualties or thefts, hobby expenses, and certain legal fees.
So even if, individually, none of these expenses exceeds 2% of your AGI, added together, you just might have a deduction that’s worth something.
Investment Expenses You Can Deduct
You can deduct most expenses related to managing your investments, including:
- Fees for a professional financial advisor if they advise you on taxable investments.
- Attorney or accountant fees required to collect or manage your investments.
- Safe deposit box rent (if you store items, such as bonds, stocks, or investment paperwork).
- Clerical help or office rent if you have a large enough portfolio to warrant an office and clerical assistance to manage your investments.
- Investment expenses from pass-through entities, such as non-publicly offered mutual funds, partnerships, and S-corporations. These expenses can be passed along in the same manner that income is passed along provided that it’s specifically stated which portion of the expenses are related to taxable-income producing investments.
- Service fees on dividend reinvestment plans or automatic investment plans. Since these fees aren’t added to your cost basis like trading commissions are, you can deduct them.
- Cost to replace missing securities certificates, including the premium you may pay for an indemnity bond in order to get new certificates.
- The cost of investment newsletters, magazines, or website subscriptions to stock market news and research sites (as long as you are using them to make decisions about your taxable investments and they aren’t excessive.) You can also deduct fees paid to a personalized advisory service.
- Trustee’s commission on a revocable trust. If you pay commissions for several years at once, you can only deduct the portion that is for that year.
When You Can Deduct Investment Expenses
In order to deduct expenses, investments must qualify and expenses must not be excessive:
- You can only deduct fees from investments that produce taxable income. Many investments produce taxable income, but it’s important to check with your broker, financial management firm, or financial advisor if you aren’t sure. Some examples of investments that don’t produce taxable income are municipal bonds or mutual funds that exclusively pay out non-taxable dividends. Your financial management firm should send you a detailed year-end statement that breaks down the fees by account type.
- If you incurred fees for an investment that produces both taxable and non-taxable income, you can only deduct the amount proportional to the taxable income produced. For example, consider a bond by which you earned $1,000 in non-taxable interest and another $2,000 in taxable appreciation because you sold it. Since you paid $90 in fees, you can include $60 in your miscellaneous deductions because your taxable amount was two-thirds of the total income produced by the investment.
- Deducted expenses must also be deemed “ordinary and necessary.” That is, you cannot deduct what the IRS considers to be excessive charges for the investments being managed. For example, if you claim expenses for your mutual fund that are five times what a mutual fund usually charges, you’re practically asking for a tax audit. You also can’t deduct expenses that the IRS deems unnecessary, such as the full-time secretary who manages your three stock picks.
Deducting Custodial Fees on a 401k or Traditional IRA
401ks and IRAs often charge custodial fees like an annual maintenance fee that are frequently paid directly from the money in your account. But because the money within these accounts was not taxed, you cannot deduct these fees.
That said, some financial management firms will let you pay custodial fees out of pocket, instead of directly from the account. In this way, custodial fees are paid with after-tax money, and can then, therefore, be deducted.
If you have a Roth IRA, Roth 401k, or a regular investment account to which you’ve contributed after-tax money, these fees can be paid directly from money in the account and also be deducted.
Investment Expenses You Can’t Deduct
There are a few expenses, such as trading commissions and brokers’ fees, you can’t deduct because they’re included in your cost basis. In other words, these fees decrease the amount you must pay capital gains tax on when you sell the investment. If you’re not sure what expenses will be added to your cost basis, check with an accountant or your financial management firm.
There are also a slew of other expense you can’t deduct, including expenses related to collateral for conducting short sales, fees for buying life insurance or borrowing against your life insurance policy, and the cost to attend shareholder meetings or investment seminars.
Since your miscellaneous expenses must exceed 2% of your AGI to be deductible, you may have previously assumed you don’t qualify for this deduction. However, especially if you’ve been jobless for part of the year, taken a pay cut, or have other large miscellaneous deductions to claim, revisit line 23 on Schedule A, do the math, and see if you do qualify.
Moreover, if you believe you should have claimed this deduction in years past, but did not, you can still file an amended tax return, provided you do so no later than three years after you filed the original.
Did you deduct investment expenses on your taxes last year?