While you can no longer deduct financial advisors' fees, there are other tax breaks you can take advantage of as an investor. First, if you're investing in a 401 (k) plan or similar in your workplace, you get the benefit of those contributions being automatically deducted from your taxable income. Itemized deductions can still be requested for charges paid for certain financial services. Under Section 212 of the Internal Revenue Code, you are allowed to deduct expenses not associated with a business, as long as they are directly related to revenue production.
First, if you're investing in a 401 (k) plan or similar in your workplace, you get the benefit of having those contributions automatically deducted from your taxable income. This is an over-the-line type of deduction, which means you can deduct those amounts regardless of whether you itemize or not. Contributions to a health savings account (HSA) would also be considered a deduction above the line. The recent tax reform has repealed the deduction for investment advisory fees and will effectively eliminate your ability to deduct them.
This will affect not only investors' tax returns, but also their net investment returns after commissions. The Internal Revenue Service allows you to deduct the fees you pay for investment advice and advice, but there are limitations. You can only cancel those charges if the investments bring you taxable income. Things can get a little complicated if your investment advisor puts you on tax-exempt municipal bonds, since the interest on those bonds is not taxable income.
Things get even more interesting if you then sell your municipal bonds for a profit, since the resulting capital gain is taxable income. In these situations, you will need to determine the percentage of the advisor's fee that applies to the taxable income that applies to your investments. Your advisor can also review the allocation of assets and the location of assets in your portfolio to help you adjust your tax management strategy. Working with a financial advisor can help you shape your financial plan when it comes to things like budgeting, saving, investing, and planning for retirement.
Simply put, the virtue of allowing the traditional IRA to “pay your way” and cover your traditional IRA counseling fees directly from the account is the ability to pay the counseling fee with pre-tax dollars. While Financial Advisor charges are not tax-deductible now, that doesn't mean they won't be tax-deductible at some point in the future. For very large advisory firms, another option to consider is to convert their investment strategies for clients into a common investment fund or ETF, so that the company's clients will not be invested through separate individual accounts that the company manages, but rather in a single (or series of) investment fund (s) that the firm creates for its clients. As the results reveal, at modest growth rates, it is a time horizon of several decades, at best, to recover the “lost tax value” of paying an advisory fee with pre-tax dollars.
Companies often included advisory fees that were deductible on this form, although the IRS does not require it. SmartAsset's financial advisor matching tool can make it easy to connect with a professional advisor in your local area. I write about financial planning strategies and internship management ideas, and I have created several companies to help people implement them. You can't take a family vacation and deduct the total cost just because you stopped to say hello to your financial planner.
However, the bottom line is simply to recognize that, even if not intentional, the tax treatment of advisory fees is now substantially different from that of advisors compensated through commissions. If itemizing proves to be your best option, you should include your investment advisory fees with your other miscellaneous expenses, which are limited by the IRS 2 percent rule. Before you change the tax code, you could deduct the fees paid for investment advice as “miscellaneous expenses” in Schedule A of your tax return. However, for larger independent advisory firms, creating a mutual fund or ETF version of their investment offering, if only to make it available to the subset of clients who are more tax-sensitive and have large stakes in taxable accounts (where the difference in treatment fiscal matters), you may find the strategy attractive.