January 25, 2023 by Steve Banner, EA, MBA
I wish I could respond to this question by saying that not only can you deduct your advisory fees if your investments make money, but you can also get your fees fully refunded by your advisor if the investment advice you received caused you to have a loss. But, sad to say, none of that is true, so we’ll just have to go ahead and talk about the rules as they are rather than how we might wish them to be. (Sigh.)
Up until the beginning of the 2018 tax year, Average Joe taxpayers like you and me were allowed to reduce their taxable income by claiming their investment fees as a miscellaneous itemized deduction on Schedule A of Form 1040. This included expenses such as:
- Fees paid to financial advisors
- Fees paid for certain legal services related to producing or collecting taxable income
- Fees paid for tax advice
- Custodial fees paid for IRA accounts
- Fees paid for accounting services
- Certain trustee fees
However, there was no deduction for those taxpayers who did not qualify to itemize on Schedule A. And even for those folks who could use Schedule A, their fees and expenses were not deductible in full. Instead, they could only claim the amount of their investment expenses that exceeded 2% of their adjusted gross income (AGI) for the year. For example, this meant that a taxpayer with an AGI of $150,000 for 2017 would find that only the portion of his 2017 investment-related expenses that exceeded ($150,000 x 2% =) $3,000 would have been eligible for the deduction. Even though it wasn't a large deduction, it was at least something that was available for taxpayers who qualified to take it.
Additionally, the costs of tax preparation also fell under the heading of a miscellaneous itemized deduction – regardless of whether you used the services of a professional or prepared the return yourself. The fees you could claim as a deduction for a self-prepared return included the cost of tax publications and tax preparation software programs. You could also include any fees you might have paid to file your return electronically. However, this all changed with the passage of the Tax Cuts and Jobs Act (TCJA) in late 2017, which made a number of significant changes to the tax code. Most of these changes were temporary, while others were permanent. The repeal of miscellaneous itemized deductions, such as investment fees and tax preparation costs, were among the temporary changes that were designed to be effective for tax years 2018 through 2025.
While it is always possible that Congress may extend these and other TCJA changes beyond 2025, all we can say right now is that this Schedule A deduction for advisory-type expenses will not be available until 2026 at the earliest.
We should also note that the TCJA changes that we have just reviewed do not apply to taxpayers who are in the business of investing. For these folks, their investment, advisory, and tax preparation costs are deducted directly from their business income on their business tax return.
But despite all of these changes, there is still some good news for those of us who like to try our luck in the stock market and other places. The TCJA did not change the rule that allows us to deduct our gambling losses up to the amount of our gambling winnings!
