Published on: 12/14/2023
Are Investment Fees Tax Deductible?
While it isn’t possible to fully avoid taxes, there are several strategies you can use to reduce the amount you owe and help lessen the sting of tax season. Strategies like investing in a tax-advantaged account, taking advantage of tax deductions and credits, and making charitable contributions can all help to minimize your tax liability.
If you’re an investor, you may be looking to take your tax planning one step further, leading you to question: are investment fees tax deductible? At one time they were. However, the Tax Cuts and Jobs Act of 2017 (TCJA) eliminated the ability to deduct investment fees for tax years 2018 through 2025.
But don’t worry just yet. There are still ways to minimize your investment fees and possibly lower your tax liability in the process.
What are the different types of investment fees?
Investment fees refer to any costs associated with managing and maintaining your investments. As an investor, it’s important to be aware of these fees and how they can impact your overall returns to ensure you’re getting the most out of your investments, including any unrealized gains. These may include:
- Management fees: These are ongoing fees charged by a financial advisor or investment manager for managing your portfolio.
- Advisory fees: Similar to management fees, these are charged by an advisor for providing investment advice and managing your portfolio.
- Custodian fees: These are charges associated with holding and maintaining your investments in a custodial account.
- Account maintenance fees: Some brokerage firms may charge fees for managing and maintaining your investment account.
- Trading commissions: If you have a managed brokerage account, every time you buy or sell an investment, you may be charged a trading commission by your broker.
It’s important to note that these fees can vary widely depending on the type of investment and the specific financial institution or advisor you’re working with. It’s always a good idea to carefully review any fees associated with your investments and factor them into your overall returns.
How the TCJA affects investment fees
The TCJA, which took effect for tax years 2018 through 2025, made several significant changes to how taxpayers can deduct various investment expenses. One of those changes was the elimination of the miscellaneous itemized deduction, which included:
- Investment advisory and management fees
- Fees for legal and tax advice related to your investments
- Trustee fees to manage IRAs and other investment accounts
- Rental fees for a safe deposit box
Prior to the TCJA, taxpayers could deduct investment fees from their taxable income if they exceeded 2% of their adjusted gross income (AGI). This meant that if your AGI was $50,000 and you paid $1,500 in investment fees, you could deduct $1,400 from your taxable income. However, under the TCJA, this deduction is no longer available.
Are investment legal fees tax-deductible?
No, under TCJA, they are not. What about investment fees for a trust, are investment fees tax-deductible for a trust? While investment fees are non-deductible on the individual level, there is an exemption for “certain incremental costs of investment advice beyond the amount that would normally be charged to individual investors.”
Whether your investment fees are trust-specific or could have been garnered by an individual alone will be determined on a case-by-case basis, and attempted deductions should be discussed with your financial advisor and tax planner.
Despite these changes, you can still find methods to reduce your investment costs and potentially tap into additional tax benefits.
Other tax-smart strategies to help offset investment fees
1. Invest in tax-advantaged accounts
Contributing to tax-advantaged accounts like 401(k)s and Traditional IRAs can indirectly help to minimize your investment fees. As these accounts allow your investments to grow tax-free, you are effectively earning a return on what would otherwise have been paid out as taxes. This can often compensate for the fees charged by your investment company.
Furthermore, many employers offer to match contributions to 401(k) accounts as part of their benefits package, which can further increase your returns and offset the cost of the fees. Therefore, maximizing your contributions to these tax-advantaged accounts can be a beneficial strategy for minimizing the impact of investment fees.
2. Take advantage of tax credits
Tax credits are another powerful tool available to investors that can significantly reduce your overall tax bill. Unlike deductions, which reduce your taxable income, tax credits directly subtract from your tax liability. For instance, if you owe $3,000 in income tax and have a tax credit of $1,000, your tax bill drops to $2,000.
Some of the common tax credits available to investors include the Foreign Tax Credit, the Child and Dependent Care Credit, and the Lifetime Learning Credit. Effectively leveraging these tax credits can not only lower your tax bill but they can also free up more of your income for investing.
Consequently, this increased investment can help offset the impact of any investment fees. It’s advisable to consult with a tax professional to understand which credits you’re eligible for and how best to apply them.
3. Leverage tax-loss harvesting
Another potent strategy to help try to offset your investment fees is tax-loss harvesting. This involves selling securities at a loss to offset a capital gains tax liability. It can be a very effective measure as it allows you to work towards reducing your taxable income while simultaneously improving your investment portfolio’s after-tax returns.
These losses, which may seem unfavorable in the short term, can offset capital gains taxes in Texas from other investments, potentially reducing your overall tax bill. In the U.S., if your losses exceed your gains, you can use the excess loss to offset up to $3,000 of other income. Moreover, if your losses are even greater, you can carry the remaining losses forward to future tax years until they’ve been fully utilized.
By effectively applying tax loss harvesting, you can work to lower your tax liability and indirectly minimize the potential impact of investment fees. This strategy, when combined with other tax-smart strategies such as investing in tax-advantaged accounts and leveraging tax credits, can help you manage your investment costs and maximize your net returns.
Keep in mind, though, that tax laws can be complex and tax-loss harvesting should be done with the assistance of a tax professional.
4. Consider held-to-maturity investments
Held-to-maturity (HTM) investments, such as bonds and certificates of deposit (CDs), can also be a tax-smart strategy that can potentially minimize investment fees. Unlike other securities that are subject to capital gains taxes, HTM investments are held until maturity and therefore don’t generate capital gains or losses. This means they may not incur the same fees as other investments.
Additionally, certain types of HTM bonds may offer additional tax advantages, such as municipal bonds that are exempt from federal income taxes. These investments can help diversify your portfolio and potentially lower your tax bill at the same time.
5. Maximize the investment interest deduction
Under the TCJA, investment interest is still deductible if it meets certain requirements. This deduction allows taxpayers to claim interest on money borrowed to purchase taxable investments.
The investment interest expense deduction limitation stipulates that the amount of interest you can deduct cannot exceed your net taxable investment income for the year. This means if you borrow money to invest and incur interest, you can deduct those interest expenses, but only up to the amount of income that investment generates.
So, for example, if you earned $5,000 from your investments but incurred $6,000 in interest, you could only deduct $5,000. Any remaining interest expense can be carried forward to future years.
This deduction is particularly useful for investors who leverage borrowing to amplify their investment potential, as it helps to negate some costs associated with such a strategy.
Looking to optimize your investment and tax strategies? Let’s talk.
While investment fees may not be fully tax-deductible under the current laws, there are still plenty of ways to help minimize their impact on your returns. By leveraging tax-advantaged accounts, tax-loss harvesting, held-to-maturity investments, and other tax-smart strategies you can potentially reduce the impact of investment fees on your portfolio.
If you’re looking for tax planning strategies for high-income earners, Avidian Wealth Solutions can help. We offer access to a boutique family office environment and a multidisciplinary team of financial professionals including tax advisors in Houston, Austin, Sugar Land, and The Woodlands.
Whether you’re looking to make optimal use of Texas 529 tax deductions or want to explore diversifying your portfolio with alternative investment strategies, our team can work with you to put a strategy in place that aims to level up your investment and tax strategies, working to allow you to keep more of your hard-earned money and achieve your financial goals.
To learn more about our comprehensive suite of financial services, schedule a conversation with us today.
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