If you have investments and you itemize deductions on Schedule A, you may be able to deduct certain expenses. This can save you thousands come tax time. Importantly, only certain investments qualify. There are plenty of exceptions and the exact value can vary by item and situation.
This article will cover:
- Which investments you can deduct.
- How much you can save.
- When the deduction doesn’t apply.
For help with other issues, check out our complete Tax Guide.
Investment Expenses You Can Deduct
The broad rules for deducting investment expenses can be summarized briefly. The deductible expenses must be:
- Ordinary and necessary to either:
- produce or collect income.
- manage property held for producing income.
- Directly related to the income or income-producing property.
- Taxable to you.
More specifically, you can deduct the following:
- Attorney or accounting fees to produce or collect taxable income.
- Service charges for automatic investment and dividend reinvestment plans.
- Office expenses, such as rent or clerical help incurred in connection with your investments or collecting the taxable income on your investments.
- The cost to replace your taxable securities that are mislaid, lost, stolen or destroyed.
- Fees paid to broker, bank or trustee to collect investment income.
- Fees paid for counsel and advice about investments that produce taxable income.
- Safety deposit box rent if you use it to store taxable stocks, bonds or other investment-related documents.
- Fees paid to set up and manage your revocable trust insofar as it is to produce taxable income or manage a property.
- Investment expenses from pass-through entities such as non-publicly offered mutual funds, S corporations, or partnerships, provided the expenses are related to taxable income.
- The cost of investment newsletters, magazines, or website subscriptions to stock market news sites and research tools, as long as you use them to make decisions about taxable investments.
When to Deduct Investment Expenses
In order to deduct expenses, investments must meet the broad rules listed above. Plus, the expenses cannot be excessive. To summarize:
- Since the deduction is a miscellaneous deduction, the portion of the expenses that exceed 2% of your adjusted gross income is deductible. Remember, each deduction does not have to exceed 2% of AGI. Rather, you add all of your miscellaneous deductions together, deductions such as unreimbursed employee business expense, tax prep fees, hobby expenses, casualty or theft losses, and certain legal expenses. Then you compare the total to 2% of your AGI. The excess is deductible. For example, if all of your miscellaneous deductions total $1,825 dollars, and 2% of your AGI is $900, the deductible portion is $1,825 – $900 = $925. So even though each deductible item may be less than $900, you still get a helpful deduction when they are combined.
- You can only deduct fees for investments that produce taxable income. If you aren’t sure, check with you broker, financial management company, or financial advisor. Some investments do not produce taxable income, such as municipal bonds or mutual funds that distribute only tax-exempt dividends. Your year-end statement from your brokerage firm should break down the fees by account type.
- If you incurred expenses for investments that produced both taxable and tax-exempt income, you can only deduct the proportion of fees that are related to the taxable income. For example, let’s say that you sold a municipal bond that generated $1,000 in tax-exempt interest. You also sold another bond that generated $2,000 in taxable interest. We’ll assume a total transaction fee of $90. The taxable income is two-thirds of the total income, so two-thirds of the fee of $90 is deductible ($60).
- Deductible investment expenses must be “ordinary and necessary.” The IRS defines “ordinary” as commonly accepted in the industry, and “necessary” as helpful or useful. So excessive fees would be disallowed. So if you claim expenses for your mutual fund that are several times more expensive than is ordinary, that might invite a tax audit. Similarly, the IRS might question other excessive expenses, such as paying for an office and secretary to manage a handful of stocks.
Deducting Custodial Fees on a 401(k) or Traditional IRA
Custodians of 401(k) or traditional IRA accounts frequently charge custodial fees, such as an annual maintenance fee. These fees are most often deducted from the money in your account. That is good because you are paying the fees with pre-tax money. But, you cannot take the fees as a deduction for the same reason: it was paid with pre-tax money. Some financial management firms allow you to pay the fees directly from outside the account. In that case, you are paying with money that has already been taxed, so the fees would be deductible. Plus, the IRS does not consider the payment of the fee as an additional contribution to the retirement account.
In the case of a Roth IRA, the money in the account is after-tax money, so any custodial fees that might be charged by the financial management company and deducted from the account can be deducted.
Investment Expenses You Cannot Deduct
There are a number of investment expenses that do not qualify. We have mentioned some of them, but you also cannot deduct:
- Transaction fees for buying or selling stocks or mutual funds. If buying, they are added to the stock’s cost basis. If selling, they are deducted from the proceeds. In either case, the fees reduce your capital gains and, therefore, any capital gains tax you might have to pay. You are already getting a tax benefit because the expenses reduce the amount of your capital gain, so the expenses cannot also be deducted as you would be getting a second tax benefit for the same fees.
- Transportation or other expenses to attend stockholders’ meetings.
- Expenses for attending investment-related seminars or conventions.
- Interest on money you borrow to buy single-premium life insurance or annuity contract.
- Expenses that produce tax-exempt income.
- Amounts you pay in connection with personal property used in a short sale.
See IRS Publication 550, Investment Expenses for the complete list of examples.
Your miscellaneous expenses must exceed 2% of your adjusted gross income in order to be deductible. Since that is frequently a high threshold, you may have assumed your expenses were not deductible, so you didn’t keep track of them. However, there is quite a list of potential miscellaneous deductions, so it may well be worthwhile to revisit line 23 on Schedule A to see if a portion of your expenses is deductible.
For help with other tax-related issues, check out our complete Tax Guide.