Can you deduct investment advisory fees




















Are financial planning fees tax deductible? What about mutual fund management fees or stock purchases? Are fees to complete my income tax return tax deductible? If you have someone complete your tax return, the fees are tax deductible only if all of the following apply: you have income from a business or property accounting is a usual part of the operations of your business or property you did not use the amounts claimed to reduce the business or property income you reported Are you an MD Financial Management client with a non-registered account?

MD Plus TM account The quarterly management and administration fee on your MD Plus account is tax deductible when incurred in a non-registered account. Head Office Alta Vista Dr.

With regards to investment income expenses, there are essentially two types: Any expense incurred in the purchase or sale of a security, such a commission or a sales load on a mutual fund. These expenses are not tax deductible. Rather, they are applied against the cost basis in the purchase or sale of the security. Expenses incurred in the production of income are tax deductible on line 23 of your Schedule A above the 2 percent of AGI threshold investment expense deductions cannot be taken on the short form.

The total amount of this deduction is capped at the amount of net taxable investment income you have for the year. Minimizing your tax liability as an investor can help you keep more of the returns you earn. While financial advisor fees are no longer deductible, there are things you can do to keep your tax bill as low as possible. Maxing out the annual contribution limits to those accounts to reduce your taxable income for the year.

Investing in tax-efficient securities, such as exchange-traded funds, inside a taxable brokerage account. Diversifying with other tax-efficient investments like real estate that yield depreciation benefits and other tax breaks. Holding assets for more than one year to take advantage of the more favorable long-term capital gains tax rate.

Tax-loss harvesting can be particularly effective for minimizing the amount of tax you have to pay on investments.

This simply involves selling off assets that have underperformed at a loss to help offset any capital gains you may have to report for the year. If that sounds complicated to you, it may be worth talking to your financial advisor to see if tax loss harvesting is a strategy that can work for you. Paying attention to changes in the tax code can help you look for opportunities to minimize the amount of taxes you pay on your investments. If you have a dedicated tax professional you work with, they can also help with managing your tax liability.

Consider talking to a financial advisor about the best ways to manage taxes each year. It takes just a few minutes to get your personalized recommendations online. As of p. Inflation is at a year high. But these Mad Money megatrends could help you fight back. Rivian's debut in the public markets has investors buying up shares of other EV sector start-ups.

But using outside funds offered the added benefit of leaving as much as possible inside the traditional IRA growing tax-deferred. Accordingly, it was really only advantageous to pay an IRA fee from the IRA if the fee was not otherwise going to be deductible on its own e. Paying the traditional IRA fee with outside funds allows generally pre-tax IRA funds to continue growing tax-deferred. Unfortunately, there is no always-correct answer. But all else is not equal, given that choosing to pay the fee with after-tax funds allows an investor to maintain a larger pre-tax IRA that itself can get years, or even decades, of tax-deferred compounding growth.

Which means eventually, the value of the tax-deferred compounding growth of the IRA can be worth more than the tax deduction of the advisory fee in the first place! Nonetheless, the breakeven period — how long it takes tax-deferred compounding growth of an IRA to beat the tax deduction on the fee in the first place — is a rather long period of years.

As shown in the chart below, even at higher rates of return, it can take nearly 20 years before the value of tax-deferred compounding growth is worth more than drawing the pre-tax fee from the IRA. And notably, these projections assume gains are turned over annually each year. One important caveat for advisors to consider is that only fees related to the production of income i. Notably, this attributable-to-the-production-of-income requirement is not new and was not impacted by the Tax Cuts and Jobs Act.

Rather, it is simply a rule that is now more relevant in a world where advisory fees are not deductible at all in outside accounts, which makes it more appealing to pay them directly from an IRA — at least, to the extent permitted. In fact, some RIAs have tried to proactively address this issue by stipulating within their advisory agreements that their fee is expressly for asset management, and that any financial planning performed by the firm is gratis, or at least merely incidental, and solely at the discretion of the client.

Whether or not such arrangements would hold up under IRS scrutiny is not entirely clear, if the reality is that the financial planning services really are a substantive portion of the total services rendered for the fee.

At least to the extent that it can reasonably be claimed as an investment management fee of the IRA in the first place. Many RIAs bill clients using a tiered approach for billing assets under management, such as the following hypothetical graduated fee schedule:.

In general, the most accepted method of billing multiple accounts and multiple types of accounts , when aggregated across a household in order to reach the specified breakpoints, is to prorate each account at each different billing tier.

The standard practice in billing these accounts would be to bill each tier using a weighted average of the accounts. While the above-referenced method of billing multiple accounts is certainly the most defensible method in the event of IRS scrutiny, some practitioners have recently postulated that a more aggressive, but more client-friendly version, of applying their fees across the various accounts.

Of course, the advisor might also simply have the client pay the Roth IRA fee from the taxable account anyway. It is an interesting thought, though, and one that hopefully one day the IRS will bless us via some sort of guidance. And ironically, while both the business and regulatory trend has been to move away from commissions and towards fees, for taxable accounts, the Tax Cuts and Jobs Act distinctly favors commissions with respect to tax efficiency of how the client compensates their advisor.

Example 3 : Sarah is a hybrid advisor who is starting a relationship with a new client, Sam. However, on December 31 st of the same year, concerned about a recession, Sarah liquidates the portfolio and moves Sam to cash.

However, any commissions paid by Sam on a purchase will add to the cost basis of his investment. Similarly, any commissions paid by Sam on a sale will reduce the proceeds of that sale. Note that this is in direct contrast to advisory fees, which have no similar impact on basis. For advisors primarily using mutual funds within their models, the transition to a commission-centric, pseudo-deductible model might be even easier.

Put differently, individuals are actually better off from a tax perspective having C shares with a 1. The total fee paid by the account owner, in either case, is the same, but the tax treatment is not!

Example 4 : Eric is a hybrid advisor who is starting a relationship with a new client, Agnes. In this situation, Agnes is clearly better off, from a tax perspective by utilizing the C share mutual funds in her planning. As such, advisors considering this option should be sure to check with their compliance department to understand their protocols and guidelines regarding the use of C shares.

Furthermore, even if such shares are allowed to be used for prolonged periods of time, advisors should carefully — make that very carefully — document the reason for their use over other potential investments.



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