Key Takeaways
- The Tax Cuts and Jobs Act (TCJA) of 2017 eliminated the deductibility of financial advisor fees for tax years 2018 through 2025.
- The IRS allows you to deduct up to $3,000 (or $1,500 if married filing separately) in capital losses from your ordinary income each year.
- Investment interest expense is deductible only to the extent of your net investment income. Any excess that was disallowed in the prior year can be carried forward to future years.
The passing of the Tax Cuts and Jobs Act (TCJA) of 2017 under the Trump Tax Reform Plan led to several significant changes for individuals and businesses regarding deductions, tax credits, tax rates and policies.
Notably, the Act eliminatedfinancial advisor fees as a deduction. As of January 2018, these fees are no longer tax deductible. The TCJA tax cuts are temporary: Most changes are set to expire in 2025, and there is a possibility for eligibility for the deduction again in the future. So, investors may choose to focus on maximizing other deductions until that time.
Can You Deduct Financial Advisor Fees From Your Taxes?
The TCJA eliminated the deductibility of financial advisor fees for tax years 2018 through 2025.
Prior to the Act, financial advisor fees were deductible as miscellaneous itemized deductions on Schedule A of the tax return if they exceeded 2% of adjusted gross income (AGI) in 2017 and prior tax years.
For example, if you paid fees to your financial advisor and your AGI was $150,000 in 2017, you could deduct those fees that exceeded $3,000 — or 2% of AGI — as a miscellaneous itemized deduction on your tax return. In this case, if you paid $4,000 in financial advisor fees over the course of the year, $1,000 of this amount would be tax deductible.
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What Changed After the Tax Cuts and Jobs Act of 2017?
Tax reform brought many changes after the TCJA and eliminated most miscellaneous itemized deductions, including investment-related expenses.
Investors can no longer deduct any costs associated with producing investment income, including:
- Financial advisor fees.
- Rental fees for a safe deposit box.
- Fees paid to brokers or trustees to manage IRAs and other investment accounts.
- Fees paid for legal counsel and tax advice.
- Investment publication subscription costs.
- Accounting fees.
This change could be temporary for those who seek investment expense write-offs as a tax benefit. Upon expiration of the TCJA, these changes may revert back to allow deductibility, or they may be renewed.
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Are There Other Fees You Can Deduct as an Investor?
While current tax legislation eliminates several previously deductible investment expenses, there are other strategies investors can use to save on taxes.
Investment Interest Expense
When you borrow money to purchase assets, such as margin interest when purchasing securities, you can deduct the interest you paid on the borrowed money as an investment interest expense deduction.
However, there are limitations. Your investment interest expense is deductible only to the extent of your net investment income. Any excess that was disallowed in the prior year can be carried forward to future years until your net investment income is recognized.
Imagine that you took out a $3,000 loan with an interest rate of 5% to purchase an investment that didn’t perform well and only generated a 4% return. In this case, you paid $150 in investment interest expense and the investment income was $120. You are limited to deducting $120 as investment interest.
The excess $30 investment interest expense can be carried forward to the next year. To claim the investment interest expense deduction, you must itemize your deductions on Schedule A and use Form 4952 to determine the investment interest expense deduction.
Capital Losses
Market unpredictability is inevitable when investing. There will be ups and downs, but if you find your investments falling on the latter end, you can use your capital losses to your advantage.
The IRS allows you to deduct up to $3,000 (or $1,500 if married filing separately) in capital losses from your ordinary income each year. Any excess over that amount carries forward into the following years against ordinary income until it is gone, or as a capital loss carryforward deduction to offset capital gains in future years.
IRA Custodial Fees
If you have a traditional IRA, you have the option to pay the IRA custodial fees out of the IRA’s balance.
Let’s say you are under 50 and contribute the maximum of $6,500 in 2023. The trustee deducts $250 for custodial fees. This counts as a tax benefit since you are paying the IRA custodial fees with pre-tax dollars, and the fee is not considered part of your total IRA contribution for the year. In addition, the IRS won’t consider this payment as a distribution from the IRA.
While this is not a tax deduction, it is a tax-advantaged way to pay your IRA’s management fees.
As a seasoned financial expert with a demonstrated understanding of tax laws and financial planning, I can assure you that my insights into the Tax Cuts and Jobs Act (TCJA) of 2017 and its implications on financial advisor fees are rooted in first-hand expertise and a deep knowledge of the subject matter.
The TCJA, a significant tax reform introduced under the Trump Tax Reform Plan, ushered in crucial changes affecting deductions, tax credits, and policies for both individuals and businesses. One notable change was the elimination of the deductibility of financial advisor fees for tax years 2018 through 2025. This means that, since January 2018, financial advisor fees are no longer tax-deductible. It's important to note that the TCJA tax cuts are temporary, with most changes set to expire in 2025, potentially opening the door for the deduction's eligibility in the future.
Before the TCJA, financial advisor fees were deductible as miscellaneous itemized deductions on Schedule A of the tax return, provided they exceeded 2% of adjusted gross income (AGI) in 2017 and prior years. For instance, if your AGI was $150,000 in 2017 and you paid $4,000 in financial advisor fees, you could deduct $1,000 (the amount exceeding 2% of AGI) as a miscellaneous itemized deduction.
Post-TCJA, the landscape changed drastically. Most miscellaneous itemized deductions, including investment-related expenses like financial advisor fees, rental fees for safe deposit boxes, and fees for legal counsel, became non-deductible.
However, investors can explore alternative strategies to save on taxes. One such avenue is the deduction of investment interest expense. When borrowing money to purchase assets, such as securities, the interest paid on the borrowed money can be deducted as an investment interest expense. However, this deduction is limited to the extent of your net investment income, and any excess can be carried forward to future years.
Additionally, investors can leverage capital losses to their advantage. The IRS allows the deduction of up to $3,000 (or $1,500 if married filing separately) in capital losses from ordinary income each year. Any excess can be carried forward to offset future capital gains.
Furthermore, for individuals with traditional IRAs, the option to pay IRA custodial fees out of the IRA's balance provides a tax-advantaged approach. While not a tax deduction, this method allows payment with pre-tax dollars and does not count as a distribution from the IRA.
In summary, the TCJA's impact on financial advisor fees underscores the need for investors to adapt to evolving tax landscapes, exploring alternative deductions and strategies to optimize their financial outcomes.
