It’s tax season, and everyone knows that one of the most important things to consider during this time of year is whether or not certain expenses are tax deductible. This is especially important for those who use financial advisors to manage their portfolios since their fees may be subject to taxes. So, if you’ve been wondering if financial advisor fees are tax deductible, the short answer is…it depends.
It all comes down to how the fees are classified and what kinds of services you’re receiving in exchange for those fees. In this article, we’ll review everything you need to know about determining whether or not your financial advisor’s fees are tax deductible.
Are Financial Advisor Fees Tax Deductible?
The short answer to this question is “not currently.” But it all boils down to the type of service that you receive from your financial advisor.
Since, January 2018 tax reform, personal financial advisor fees are no longer deductible. The current jobs act runs from 2018 through 2025, which could make advisory fees tax deductible again.
Now, to determine if you can deduct your financial advisor’s fees and have any tax breaks, you’ll need to consider the type of advice you’re receiving and decide if it’s for business purposes or personal financial planning.
Generally, if the advice or custodial fees relates to your taxes or investments, it’s likely, not deductible. However, suppose it’s advice related to purchasing or selling a business, improving your business operations, or any other guidance to help you make money through a business venture. In that case, it may be considered tax deductible.
Ultimately, however, the IRS will determine whether your financial advisor fees are tax deductible. The best thing you can do is consult a qualified tax professional who can advise you on whether it makes sense for your situation.
Overview of Financial Advisor Fees
Not all financial advisors are the same, and there are different types of fees that you may encounter when you work with a financial advisor. Most advisors charge a commission or an advisory fee, but some may do both.
Commission Fees: These fees are charged by advisors who work on a commission basis, and they’re typically based on the size of the financial transaction they’re managing. Commission fees are usually a percentage of the total amount invested or traded.
Advisory Fees: These fees are charged by advisors who provide ongoing advice and guidance. Advisory fees can be based on a percentage of your portfolio or an hourly rate for their services, and these fees are often recurring on an annual or quarterly basis.
No matter the fee structure your advisor has, it’s important to ask questions and ensure you understand how your advisor will be compensated so you can determine whether they fit your needs.
When Are Financial Advisor Fees Tax Deductible?
If you’re looking to hire a financial advisor, you might wonder, “Are financial advisor fees tax deductible?” The answer is—it depends.
Financial advisor fees are generally not deductible, but a few exceptions exist. Here are some of the situations in which you might be able to deduct your financial advisor fees:
Investment Advisor Fees
If you hire an investment advisor to manage your investments and make decisions on your behalf, your fees can be treated as an investment expense and deductible on your taxes. Note that this only applies to the fees for services that generate taxable investment income.
Wealth Management Fees
Wealth management fees can also be deductible if they help produce taxable income, such as interest or dividends. Creating trusts or estate planning fees may also be deductible under certain circumstances.
Investment Tax Preparation Fees
If you hire someone to help you prepare taxes related to your investments, such as capital gains or dividends taxes, the associated preparation or legal fees could qualify for a deduction. However, it would help if you itemized to take advantage of these deductions. It’s important to consult with a qualified professional before claiming any deductions on your taxes.
What Kind of Accounting and Tax Professionals Can Help?
If you’re wondering if you can deduct financial advisor fees, you must speak to a qualified accountant or tax professional. But not every accountant or tax pro will be able to answer this question for you correctly. The ones who can are Enrolled Agents, Certified Public Accountants (CPAs), or tax attorneys – all of whom have extensive experience and knowledge in taxation.
Enrolled Agents licensed by the IRS are taxation experts who have passed an extensive exam on tax law and are authorized to practice before the IRS at any level.
Meanwhile, Certified Public Accountants (CPAs) handle various complex financial tasks, from creating budgets and cash flow statements to analyzing investments and preparing taxes. Tax attorneys interpret federal and state income tax laws and represent clients in IRS cases.
So if you want to determine whether financial advisor fees are deductible, hiring one of these professionals is best to ensure that your deductions align with current laws.
Types of Tax Professional Services Available
Do you know what types of professional tax services are available to you? Here’s a quick list of the most common services that we might suggest for you:
- Tax preparation: A qualified tax professional can help you prepare your taxes yearly. They can also advise on strategies and deductions you may be eligible for based on your income and other factors.
- Tax planning: This service helps ensure compliance with all legal requirements while minimizing taxes. It also involves strategizing around investments and other financial decisions to reduce the taxable amounts as much as possible.
- Tax representation: If you’re facing an audit or other issues with the IRS, a qualified professional can provide representation on your behalf and advise on potential resolutions or solutions so that they’re handled most efficiently.
By working with a financial advisor, these types of tax-related services are made easier and more efficient, saving you both time and money in the long run—and potentially making financial advisor fees tax deductible for some situations or pieces of advice!
How to Decide Which Professional Services Are Right for You
It’s important to do your research to determine which professional services are right for you, and the most important factor to consider is the fees you’ll be paying. We know you’re wondering if those fees are tax deductible, and it depends on the type of service.
Investment Management Fees
Investment management fees for portfolio and financial planning are generally not tax deductible. This is true even if a registered investment advisor or a certified financial planner performed the services. The IRS requires that you itemize your deductions to deduct these types of expenses, and the total deduction must exceed 2% of your adjusted gross income.
Accounting Fees
However, those fees can generally be deducted as miscellaneous business expenses if you use professional accounting services or consult with tax attorneys. For any deductions to apply, you must prove that the services were necessary for your business operations and have produced a tangible benefit (e.g., increased profits).
The bottom line is that while investment management fees may not be tax deductible, accounting fees can be — so it’s important to understand the differences between these services and choose wisely based on what makes financial sense for your business.
Tips for Finding a Financial Advisor or Tax Professional
If you’ve decided to hire a financial advisor or tax professional, here are a few tips for finding the right one for your needs.
First, research and look for professionals specializing in your unique financial situation. For example, if you’re looking for someone to help with retirement planning, ensure the professional has experience in that area.
Another important tip is to ask for referrals from people you trust. It’s always a good idea to hear from others who have had a positive experience with a professional.
You should also ensure they are certified or credentialed by a recognized organization such as the Certified Financial Planners Board (CFPB). Knowing they have the necessary training and experience to help with your needs will give you peace of mind.
Finally, ensure they are trustworthy and reliable by checking their references and ensuring they have the required licenses in your state or province.
By following these steps and finding someone qualified and knowledgeable within your field, you can feel confident that their rates are worth it — whether or not they’re tax deductible.
What Else Can You Deduct as an Investor?
You may be wondering if there are other tax deductions that you can apply as an investor. The good news is that, yes, there are a few more that you can claim. Here’s a list of the most common ones:
- Investment Expenses: Investment advisors usually charge an annual fee for their financial advice and planning services. These fees are typically tax deductible, as are brokerage commissions, bank fees, and other related expenses like margin interest and financial software subscriptions.
- Tax Preparation Fees: Tax preparation fees related to filing taxes for your investments are also deductible, so keep track of those expenses throughout the year.
- Hobby Expenses: If you participate in any hobby-related activities in connection with your investments (like collecting coins), you may also be able to deduct any associated costs from your taxes.
- Education Expenses: Finally, if you spend money on courses or seminars related to investments or stock trading, those fees may also be tax deductible.
Taking advantage of these deductions can help you save some money on taxes when investing — keep track of all related expenses throughout the year and consult a qualified tax professional for advice specific to your situation!
Other Considerations
When deciding whether to hire a financial advisor, there are many things to consider beyond whether or not the fees are tax deductible.
Time and effort saved
First, there’s the time and effort that a financial advisor saves you. A professional money manager can help you to make decisions based on their expertise, which could be a great way to free up your time for other pursuits. Plus, they can provide a personalized plan and help you to stay on track with your goals.
Expertise and experience
Second, consider their expertise—a good professional money manager will have experience beyond what you’d typically know. For example, they will understand tax laws and be able to maximize your deductions in ways that you hadn’t considered before. They’ll also have access to information that could give you an edge over competitors in the stock market.
Lastly, ask yourself if their fees are worth it compared to what they can provide regarding advice and guidance (which could potentially result in financial gains). The best decision is one that factors in all of these considerations—and the bonus is if it’s tax deductible!
Tax Cuts and Jobs Act of 2017
In December 2017, the Tax Cuts and Jobs Act of 2017 was signed into law. This tax code overhaul changed the rules around certain tax deductions. So, is financial advisor fees tax deductible under this new law?
The answer is complicated because it really depends on a few things. The TCJA states that to be eligible for a deduction, the services must be what the IRS considers an “ordinary and necessary” expense—in other words, common and expected expenses in a given industry or trade.
This act made most financial advisor fees not deductible through tax year 2025.
For financial advisors’ fees to be eligible for tax deductions, you must provide evidence proving that you’re an active investor. This means showing your track record of investments over time — and detailing how your advisor’s expert insights informed your investment decisions. So if you receive advice from an advisor who is also managing your portfolio for you, those fees should be eligible for deduction. However, if you only take their general advice without portfolio management, it likely won’t qualify as a tax deduction.
It’s important to consult with a CPA or tax specialist to determine what expenses related to financial advisors can be deducted from your taxes by these new rules.
Investor Tax Strategies
When it comes to financial advisor fees, there are a few tax strategies you might want to consider.
Tax Deductions
The most obvious one is to check if the fees are tax deductible. With some financial advisors, the fees may be considered business expenses and thus deductible from your income taxes.
Capital Gains Tax Relief
Another strategy for investors is to use capital gains tax relief. This means capital gains from investments would be taxed lower than regular income taxes, potentially saving you some tax savings.
Of course, you’ll need to check with your financial advisor or a tax professional to determine what strategies will work best for your individual situation. Every investor’s taxes differ based on their investments and other factors, so it pays to consult an expert before making any major decision about taxes and investments.
FAQ
Sometimes hiring a financial advisor can feel overwhelming, and you might have questions. Here are the most frequently asked questions about whether financial advisor fees are tax deductible:
- Is my financial advisor fees tax deductible? – Certain fees and expenses are eligible for tax deductions when they meet certain criteria.
- What type of financial advisor fees are tax deductible? – Generally speaking, any fee paid to a qualified professional for advice or services is potentially tax deductible. This includes registered investment advisors, broker-dealers, and specialized advisors like estate planners or insurance brokers.
- What types of expenses are not tax deductible? – Fees paid to an unregistered individual or non-profit organization may not be eligible for a deduction, so it is important to determine the type of services you are paying for before seeking a deduction on your taxes.
- Is there a limit on the amount of deductibility? – Yes, if the fees and expenses paid to exceed 2% of your adjusted gross income, then only the amount exceeding that limitation can be deducted from your taxes.
When deducting financial advisor fees from your taxes, ensure you understand what expense you’re paying and how much you can claim as a deduction to ensure you get the most out of your money!
Tax Deductible Financial Advisor Fees Recap
Financial advisor fees have been a topic of interest for taxpayers for many years, especially for those interested in maximizing their tax benefits. For example, if you pay fees for investment advisory or custodial services related to your IRA, you may wonder if these fees are tax deductible. The answer is it depends on several factors.
Prior to 2018, investment advisory fees were classified as a miscellaneous itemized deduction, which means they were deductible on Schedule A of the tax return, subject to a 2% of adjusted gross income (AGI) threshold. However, the 2018 tax year reform eliminated the deductibility of financial advisor fees and other miscellaneous itemized deductions until 2025. This means that investment advisory fees are no longer eligible for an itemized deduction on your tax return unless a retirement plan at work covers you.
However, if you are paying investment fees with pre-tax dollars, such as in a Traditional IRA, you can claim a deduction for those fees on your tax return. Additionally, if you have investment interest expenses, you may be able to deduct those expenses on your tax return as well. It’s important to note that the Internal Revenue Service (IRS) has specific rules regarding investment expenses, so it’s important to consult with a tax professional who can help you shape your financial plan regarding tax benefits.
Conclusion
In conclusion, determining whether financial advisor fees are tax deductible is a complex process that requires careful consideration of your situation and the laws in place. With the proper research and planning, you may be able to take advantage of the potential tax savings associated with hiring a financial advisor.
Discussing potential tax savings with a certified financial planner or tax professional can help you make the most informed decision. In many cases, the fees you pay for advice may be more than offset by the taxes you save. Ultimately, it all comes down to you and your unique situation – so ensure you have all the information and resources you need to make the best decision for you and your financial future.
Learn more about Taxes and Investing with our helpful guides.