If you are preparing your income tax returns, you might wonder whether brokerage fees are tax deductible. Even if you were able to deduct these fees in the past, it’s important to consider recent changes to the tax code and how they might impact what you can and cannot deduct for tax year 2018. A thorough comprehension of the tax code and the help of an attorney and an accountant can ensure that you maximize your tax benefits while also filing within legal limits.
Tax Cuts and Jobs Act
The federal Tax Cuts and Jobs Act took effect in 2018. It has made an impact on the way many special case scenarios are treated on tax returns. One of the major changes includes the removal of brokerage fees from the list of possible tax deductions. Previously, the investment interest deduction allowed you to get a tax break against investment and custodial fees. Under this deduction, it was permitted to take brokerage fees and other miscellaneous itemized deductions, provided they exceeded 2 percent of your adjusted gross income.
Are Brokerage Fees Tax Deductible?
As of this writing, the IRS will not allow you to write off any form of a transaction fee. This includes brokerage fees or any other monies paid out when you buy or sell stocks. You can add these fees to the purchase price for your stocks, however. Doing so will lower the amount of funds that the IRS considers to be income. In practice, that means that you cannot deduct the transaction fees directly, but you can reduce the amount of taxable gain by factoring in your costs against the purchase price. In essence, you are adding the amount you paid as a taxable loss instead of getting a deduction directly from the taxes.
While transaction and brokerage fees are not deductible, it is possible to deduct other expenses that accompany your investment income. Among the items you can write off as an expense is the cost of a safe deposit box used to keep your stock certificates or other investment-related documentation. Legal fees and fees for professional consulting relating to your investments can also be deducted. This means that if you have a financial advisor, her annual fee counts as a deduction. Another tax-deductible cost includes financial publications and any fees paid to financial institutions or to trustees holding your investment income.
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Is Margin Interest Tax Deductible?
Depending on your specific situation, margin interest tax may be deductible. If you borrowed money with the purpose of financing investments, the interest you pay is called investment interest. Margin interest charged by your broker for loans to buy stocks, and any interest you paid on monies borrowed to buy raw land can be deducted up to the amount of your net income for the investment. However, there are eligibility requirements you must meet before you can deduct these expenses.
First, you must be an investor who borrows money to buy investments and receives income in the form of interest, dividends, capital gains or royalties. This means that if you do not borrow funds to purchase your investments, you will not be able to include those payments in your deductions.
You must also itemize your deductions on Schedule A when filing your taxes. Every taxpayer has the option to itemize their deductions instead of claiming the standard deduction. If you have significant deductible expenses, you have the option of using Schedule A to maximize the amount of your deduction. Traditionally, there have been seven categories of these expenses: medical/dental, taxes, interest, charitable donations, theft/casualty losses, job expenses and miscellaneous expenses.
As of your 2018 filing, you will no longer be able to deduct any miscellaneous expenses. The remaining six items on Schedule A now have different specific requirements and limitations, so be sure to consult with your tax professional to discuss the margin interest deduction.
Are Investment Fees Tax Deductible?
Depending on your specific situation, investment fees may or may not be tax deductible. You can deduct interest expenses up to the amount of your net investment income. To find your net investment income, take your investment income and subtract your expenses, not including interest expense. Some examples of investment expenses include safe deposit box fees, cost of publications regarding your investments, advisory fees and depreciation/depletion of assets that produce investment income like your computer. You can also deduct investment expenses as reported on form Schedule K-1 from a partnership or S corporation.
Other deduction rules include the fact that, if you borrow for business or personal reasons, you can only deduct the interest expense for the amount borrowed for investments. This means that you can only deduct money that you spent specifically for investments. In addition, interest expenses greater than your net investment income can be deducted from the current year’s interest income, then carried forward to remaining amounts for future years. You cannot deduct interest that you do not pay. Therefore, any added interest to your amount or any additions to loan principal does not count. Finally, prepaid interest is not tax deductible
Tax-Deductible Financial Advisor Fees
In some instances you may be able to deduct the fees of your financial advisor. Deduction of advisor fees is not the same as the deduction of transaction fees. A broker’s transaction fees have traditionally been lumped into the now-removed miscellaneous category of tax deductions on your Schedule A.
The difference with your advisor's fees is that you are paying for their expertise in the same way you would pay for information gleaned from an investment publication. Instead of counting this directly, you would add it as an expense incurred during investing. Depending on what your specific needs are, you could have those fees deducted. To be certain, you should contact a tax professional or your financial advisor directly.
If you travel to speak to your investment counselor, you can deduct those travel expenses as part of managing your investments. You cannot, however, deduct the cost of attending investment seminars, trade shows or conferences. Travel expenses to annual stockholder meetings are not tax deductible for any reason, even if you own stock.
Are Management Fees Tax Deductible?
Management fees are not tax deductible. Deductions are only permitted for expenses that you incur as a direct product of your income. That means that planning fees are not tax deductible, while investment management and tax planning are deductible. Tax preparation fees are also deductible, but the preparation of estate planning and tax strategies are not deductible. The difference is in the classification of those fees and expenses. Under the 2018 tax law, you are unable to deduct any miscellaneous expenses. Miscellaneous itemized deductions were previously only deductible if they exceeded 2 percent of your adjusted gross income.
The Tax Cuts and Jobs Act substantially increased the standard deduction and removed a host of miscellaneous itemized deductions that were subject to the 2 percent-of-AGI floor. Technically, the suspension of miscellaneous deductions is to last for eight years through 2025. This suspension is due to be renewed or removed in 2025. Regardless of how the changes shake out, the fact remains that no deductions for any miscellaneous itemized deductions will be valid at least until after 2025.
Danielle Smyth is a writer and content marketer from upstate New York. She holds a Master of Science in Publishing from Pace University. Her experience includes years of work in the insurance, workers compensation, disability, and background investigation fields. In addition to being the content writer and social media manager for Alliance Worldwide Investigative Group, she has written on legal topics for a number of other clients. She owns her own content marketing agency, Wordsmyth Creative Content Marketing (www.wordsmythcontent.com) and enjoys writing legal articles and blogs for clients in related industries.