02 Sep What investment costs can I deduct?

Q. I know I can take tax deductions for investment costs. What is included in that?

A. Lots of different investment costs can be deducted. Just make sure you do it right.

Investment management fees are deductible as a miscellaneous deduction on Schedule A, said Brian Kazanchy, a certified financial planner with Regent Atlantic Capital in Morristown.

“These are fees paid to an investment advisor for portfolio management,” he said. “It does not include trading commissions or mutual fund fees.”

You can deduct fees paid on your total portfolio as long as they are paid from a taxable account, Kazanchy said. If your IRA account pays its own fee, then you do not take a deduction on schedule A because you are already using pre-tax dollars to pay the fee.

Let’s get to the nitty gritty.

The expenses must be directly related to the income or income-producing property, and the income must be taxable to you, said Dean Shah, a certified financial planner with Stonegate Wealth Management in Oakland.

Miscellaneous itemized deductions are generally limited to the amount of expenses over and above 2 percent of your adjusted gross income (AGI).

Shah said some of the expenses you may be able to deduct are:

• Investment advisor fees for investments that produce taxable income (and as Kazanchy noted, fees for IRA accounts are not deductible unless paid by cash outside the IRA). Fees for Roth IRAs or regular investment accounts are deductible even if paid directly from money in the account.
• Subscription cost to financial publications.
• Software or online services used to manage investments.
• Rent paid for a safe deposit box if you use the box to store taxable, income-producing documents.
• Attorney or accounting fees necessary to produce or collect taxable income.
• Service charges paid to participate in an automatic investment service and/or dividend reinvestment plan.
• Clerical help or office rent if you have a large enough portfolio to warrant an office and clerical assistance to manage your investments.
• Fees paid to a broker, bank, trustee, or similar agent to collect investment income, such as your taxable bond interest or dividends on shares of stock.
• If you set up a revocable trust and have its income distributed to you, you can deduct the commission you pay the trustee for managing the trust.
• Costs to replace lost security certificates.

There are plenty of expenses that are not deductible, Shah said:

• Attendance at stockholders’ meetings or investment related seminars.
• Costs for single-premium life insurance, endowment, and annuity contracts.
• Expenses incurred producing tax-exempt income.
• Interest on money borrowed to buy tax-exempt securities or shares in a mutual fund or other regulated investment company that distributes only tax-exempt interest/dividends.
• Any part of the commission used for producing or collecting tax-exempt income or for managing property that produces tax-exempt income.
• Trading commissions — these are “capitalized” to adjust your cost basis for taxable sales proceeds

Learn more by reading IRS Publication 550: Investment Income and Expenses.

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This story was first posted in September 2015.