IRS

The Tax Treatment of Investment Management Fees

IRS

Around this time of the year, we are frequently asked about the tax deductibility of investment management fees. The answer, like most things related to the tax code, is not a simple one.

In general, when paid out of a taxable account, investment management fees are a tax-deductible expense. They can be listed on Schedule A in the section titled “Job Expenses and Certain Miscellaneous Deductions” on line 23. Whether you can actually obtain a tax benefit from deducting investment expenses depends on the total of all your miscellaneous itemized deductions relative to your income. Specifically, only the amount beyond 2% of your adjusted gross income is deductible. For example, if you have $100,000 of income and $3,000 in miscellaneous itemized deductions, you can deduct $1,000. Retirees are far more likely to qualify for a deduction than working people, and anyone who is subject to the alternative minimum tax may not benefit from the deduction.

While a fee taken from a traditional IRA account is not tax-deductible, it still has the advantage of coming out as pre-tax dollars. Recall that these withdrawals are normally taxed at your marginal tax rate. Please note that IRA accounts can only pay fees for themselves and other IRA accounts for the same person. It is possible that fees charged to an IRA for other accounts may constitute a withdrawal, and thus may be subject to taxes and penalties.

While getting money out of a traditional IRA without taxes can be advantageous, taking management fees out of a Roth IRA is not because the funds that are in a Roth IRA will never be taxed again.

Commissions are treated differently from investment advisory fees. Commissions paid when buying and selling securities are not tax deductible. However, commissions paid when buying go into your cost basis, and commissions paid when selling are deducted from your proceeds, which reduces your capital gains.

As with all tax-related questions, IFA’s advice to our clients is to consult a qualified tax professional. None of the statements in this article should be construed as tax advice.