Many times when reviewing clients’ tax returns, I come across a common mistake – the deduction of investment management fees. Far too often, these fees are being handled incorrectly – deductions are being taken when they should not be or no deduction is being taken when there should be. As with most tax related issues, the answer to this question is more complex than a simple yes or no.
The answer ultimately depends on how the management fees are being paid. Investment management fees can be used as an itemized deduction when paid from a taxable account. Simply stated – a non-retirement account. The deduction is listed on Schedule A under Job Expenses and Certain Miscellaneous Deductions. As with any expense listed under this section, the deductible portion must exceed 2% of your Adjusted Gross Income (AGI). For example, if your AGI was $100,000 and your total miscellaneous deductions equaled $3,500, the amount deductible would be $1500 ($3500 minus 2% of AGI).
Investment management fees cannot be used as an itemized deduction when the fees are being paid directly from a qualified retirement account such as IRAs and Roth IRAs. When paid from the IRA, the fees are paid with 100% pre-tax dollars and never reported as taxable income. When paid from a Roth IRA, fees are paid with tax-free dollars. Therefore, taking an itemized deduction for management fees paid from a qualified retirement account that already receives special tax treatment would be considered double dipping in the eyes of our favorite Uncle.
It’s important to remember each individual’s investment and tax situation is unique. Therefore, it is best to consult with your financial adviser to determine the best strategy for paying investment management fees. On a side note, tax season has officially arrived. Due to the observed holiday by the District of Columbia for Emancipation Day the tax filing deadline for 2016 is April 18.