Are your financial advisor fees tax-deductible?
A financial advisor can assist you in creating a budget, saving money, investing, and planning for retirement, among other things. Can you claim some or all of the fees you pay your financial advisor as a tax deduction? Prior to 2018, miscellaneous investment-related fees could be deducted as investment-related expenses. The Tax Cuts and Jobs Act, on the other hand, has altered what you may and may not deduct as a taxpayer.
Are fees charged by financial advisors for providing advice on financial matters taxable?
Prior to the Tax Cuts and Jobs Act taking effect, investors were able to reduce their taxable income by claiming a deduction for miscellaneous itemized deductions. Those deductions included expenses related to investing, such as:
- Financial advisor fees
- Custodial fees paid to IRA accounts
- Accounting costs
- Fees for legal and tax advice
- Trustee fees
Individuals who wanted to benefit from this tax break had to claim miscellaneous itemized deductions that exceeded 2% of their adjusted gross income (AGI).
Beginning in 2018, the Tax Cuts and Jobs Act eliminated these deductions. The act’s other changes to the tax code are set to remain in effect through 2025. If the Internal Revenue Code is altered again beyond 2025, the miscellaneous itemized expense deduction may also be reinstated.
What are the things you can deduct when you invest?
Even though you are no longer able to deduct financial advisor fees, there are various other investment tax breaks that you may be eligible for. First, your 401(k) or similar employee retirement plan contributions are automatically deducted from your taxable income. Above-the-line deductions are those that are deducted regardless of whether you itemize or not, and health savings account contributions are considered above-the-line deductions that lower your taxable income.
Your income level, filing status, and whether you receive a retirement plan through your job determine whether you can deduct your traditional IRA contributions.
Married individuals who file separately are not eligible for a complete IRA deduction, but may take advantage of a partial deduction for traditional IRA contributions. If you’re not covered by a retirement plan at work, file as single, head of household, or are married and your spouse does not have a retirement plan at work, you may claim a full traditional IRA deduction regardless of income. The Internal Revenue Service (IRS) adjusts the AGI limits for traditional IRA deductions to account for inflation annually.
The Tax Cuts and Jobs Act still allows for investment interest expenses to be deducted on Schedule A if you itemize. You can claim the interest you pay on margin loans if you trade on margin in a taxable stock brokerage account. The cap on this deduction is the sum of your net investment income for the year.
What tax strategies are useful when you invest?
Although financial advisor fees are no longer deductible, there are still things you can do to keep your tax bill as low as possible. Use a tax-advantaged account to lower your taxable income, such as your 401(k). Don’t sell off your assets in the same year if you can avoid it, to avoid the capital gains.
Tax-loss harvesting can be particularly effective for reducing the amount of taxes you must pay on investments. Simply selling off underperforming assets to offset any capital gains you may have to report for the year is how this is done.
It’s important to be aware of IRS wash sale violations when harvesting losses in your taxable account, or you may lose tax benefits. The wash sale rule prohibits you from replacing an asset with a substantially similar one for tax-loss harvesting either 30 days before or 30 days after selling an asset at a loss. Your financial advisor can help you fine-tune your tax management strategy by reviewing your portfolio’s asset allocation and asset location.
What’s the takeaway?
It’s important to keep track of tax code modifications so you can minimize your investment taxes. Right now, financial advisor fees are not tax deductible, but that may change in the future. Working with a tax professional is useful because they can keep you up to date on changes to tax code.
Don’t miss tax tips delivered to your inbox: