I have two asset management accounts with my financial adviser. One is an IRA and one is a taxable account. Both are managed by my financial adviser and I am automatically billed quarterly. The fees are deducted directly from my accounts. I assume I can deduct these fees. Are there any special requirements to do so?
-- John Hansch
Seems like lots of people are tallying up their investment-related deductions. Between the tax tips on last weekend's
"TheStreet.com" TV show and Saturday's
Tax Forum, my email is flooded! So today, let's take another look at the topic.
If management fees are paid directly from your IRA account, you cannot deduct them. The money grows tax-free, so the
Internal Revenue Service
doesn't feel the need to give you any more benefits, like a tax deduction.
Instead, have your adviser send you a bill for his or her IRA-planning services, or ask that those costs be deducted from your taxable accounts, says Rande Spiegelman, a senior manager in
investment advisory-services group in San Francisco.
Fees taken from your taxable accounts
deductible. But remember, these fees are investment-related expenses, so they're deductible only once they exceed 2% of your adjusted gross income.
Deducting Brokerage Fees
I wanted to know if the brokerage fee is tax deductible. I use an E*Trade account, and whenever I make a buy or sell I pay $20. -- Manoj Chopra
The fees you pay to make trades are not deductible as investment-related expenses. Instead, they are added to your cost basis of your security. Later, when you sell the security, the fees are subtracted from your taxable proceeds.
For example, if you buy 10 shares of a security for $100, and the commission is $20, your cost basis in those shares is $120. If you sell those 10 shares for $150, your proceeds (after paying a $20 commission) would be $130.
Adding commissions to your cost basis is a better deal than deducting them as an investment expense. In our example, your net capital gain is only $10 ($130 - $120). If instead the $40 in trading costs (the $20 fee on both sides of the transaction) were pulled out as investment expenses, not only would you now owe tax on $50 ($150 - $100) worth of capital gains, but you probably wouldn't get the full $40 deduction because of that 2% of adjusted gross income threshold I mentioned earlier.
Is the cost of estate planning tax deductible? Does it matter if a tax attorney is consulted or an estate-planning attorney is consulted? -- Kazuko Meissen
Sorry I can't give you a definite answer. It depends.
Legal fees are deductible only if they are connected with the production of taxable income.
If you sit down with an estate attorney to decide what to leave to your kids, that time is not deductible. Drafting a will does not help you produce taxable income (though it could help your heirs make money).
But if your legal fees are estate-tax related they're deductible, says Martin Nissenbaum, national director of personal income tax planning at
Ernst & Young
in New York. For instance, any legal fees you pay to quantify your estate tax bill are deductible.
When billing, your attorneys should distinguish between tax-related and nontax-related services to help you make the determination, says Nissenbaum.
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TSC Tax Forum aims to provide general tax information. It cannot and does not attempt to provide individual tax advice. All readers are urged to consult with an accountant as needed about their individual circumstances.