Yes, with certain limitations. Section 212 of the Internal Revenue Code permits an itemized deduction for tax and/or investment advice in the miscellaneous section of Schedule A. It is subject to a 2% floor of the adjusted gross income (AGI) on a personal tax return.
Now, let’s take a quick look at some of the details here. First of all, the IRS says that you can deduct the fees that you pay for advice about investments that produce taxable income. So, fees paid for the management of tax-exempt investments, such as municipal bonds, are not deductible. Nonetheless, the IRS has determined that traditional investment advisory fees, including ongoing Assets Under Management fees, generally are deductible as long as they’re not directly attributable to the management of tax-exempt assets.
The 2% floor of your adjusted gross income is the same restriction that applies to all of your miscellaneous itemized deductions (safe deposit boxes, tax preparation fees, etc.). For example, suppose your AGI is $100,000 and that you have $10,000 in itemized expenses. So the 2% AGI floor is then $100,000 times 2% or $2,000. This means that you can deduct $8,000 ($10,000 – $2,000). Additionally, if the Alternative Minimum Tax (AMT) applies to you, some or all of these deductions could be disallowed.
Finally, if you hold both taxable and tax-deferred investments, there’s the question of which accounts to withdraw the investment advisory fees from. If you’re young and have time to let your investments grow, it’s generally better to leave your tax-deferred accounts undisturbed. However, if you’re retired it may make sense to withdraw the fees from your tax-deferred account (such as a traditional IRA). Here’s an example on this point. Suppose investor A withdraws $25,000 from his tax-deferred account and pays his advisor the annual $10,000 AUM fee by check. He will report $25,000 in ordinary income and a $10,000 itemized deduction. Now, suppose investor B withdraws $15,000 from their tax-deferred account and pays their $10,000 advisory fee from that same account. Investor B then gets a $10,000 tax-free withdrawal. The details of your personal situation determine which approach is best for you.
So, while an advisory fee is generally deductible, there are some details to think through. Fortunately you don’t have to figure this out on your own. Guidepost Financial Planning is able to help you with this and all other aspects of your financial planning. Please visit our website or give us a call at 970.419.8212 so that we can discuss your financial goals in a no-charge, no-obligation initial meeting.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.