Are Financial Advisor Fees Tax Deductible?

Many people who pay for professional financial guidance wonder if they can deduct those costs on their taxes. The rules surrounding the deductibility of these fees have changed in recent years, creating confusion for taxpayers. Understanding the current landscape is important for proper tax filing. This article will explore the current rules for individuals, businesses, and fiduciaries.

The General Rule for Individuals

For most individual taxpayers, financial advisor fees are not deductible on a federal income tax return. This is a direct result of the Tax Cuts and Jobs Act of 2017 (TCJA), which suspended a category of deductions known as miscellaneous itemized deductions. This category previously included investment fees and financial planning costs, and the suspension is in effect for tax years 2018 through 2025.

To appreciate the change, it is helpful to understand the old rules. Before the TCJA, taxpayers who itemized deductions could deduct certain investment-related expenses on Schedule A. These expenses were grouped with other miscellaneous deductions, and the total was only deductible to the extent it exceeded 2% of the taxpayer’s adjusted gross income (AGI).

This 2% AGI threshold meant that even under the old law, many taxpayers did not receive a benefit unless their fees were substantial relative to their income. For example, a taxpayer with an AGI of $150,000 would have needed more than $3,000 in miscellaneous deductions before any amount became deductible. The TCJA eliminated this entire category of deductions for individuals.

The suspension applies to a broad range of fees paid for the production of income, including fees paid to brokers for managing investment accounts, costs for legal and tax advice related to investments, and subscription costs for investment publications. As a result, individuals paying for personal financial planning cannot currently claim these expenses to reduce their federal taxable income.

Deductibility for Business and Rental Activities

While individuals cannot deduct personal investment advisory fees, an exception exists for expenses related to a trade or business. If financial advisory fees are incurred for a business reported on Schedule C or for a rental activity on Schedule E, they can be deducted. These costs are considered ordinary and necessary expenses under Internal Revenue Code Section 162.

The distinction lies in the purpose of the advice. For a sole proprietor, fees paid to a financial advisor for guidance on managing the business’s cash flow, retirement plan services for the company, or succession planning would be deductible. This is different from advice on managing the owner’s personal brokerage account, the fees for which are not deductible.

For owners of rental properties, advisory fees related to the management of the rental finances are deductible on Schedule E. This could include advice on financing for a rental property, managing rental income and expenses, or tax planning specific to the real estate investment. If an advisor’s fee covers both personal and rental property advice, only the portion attributable to the rental can be deducted.

This treatment is analogous to how tax preparation fees are handled, where a CPA often allocates their total fee between personal tax preparation and the preparation of Schedule C or E. Taxpayers must maintain clear records to substantiate the allocation of advisory fees to their business or rental activities to claim a valid deduction.

Special Rules for Trusts and Estates

Trusts and estates operate under a different set of rules and are generally permitted to deduct investment advisory fees. These deductions are claimed on Form 1041, the U.S. Income Tax Return for Estates and Trusts. The fees are considered necessary costs for the administration of the trust or estate, stemming from a fiduciary’s responsibilities.

The regulations specify that these are costs that would not have been incurred if the property were not held in a trust or estate. This position allows fiduciaries, such as trustees and executors, to deduct expenses like trustee fees, accounting fees, and certain investment advisory fees. These deductions reduce the trust or estate’s adjusted gross income.

Final regulations have clarified that investment advisory fees charged to an estate or non-grantor trust that exceed the fees customarily charged to an individual investor are fully deductible. This might include incremental costs for specialized services, such as balancing the competing interests of various beneficiaries, a task unique to fiduciaries.

State Tax Considerations

The previous sections focused on federal income tax law, but state income tax rules do not always align with federal law. The concept of state tax conformity describes how closely a state’s tax code follows the federal Internal Revenue Code. While many states adopt federal changes, others do not.

A number of states have “decoupled” from the TCJA’s provision that suspended miscellaneous itemized deductions. In these states, taxpayers may still be able to deduct financial advisor fees on their state income tax return, even though the deduction is disallowed at the federal level.

Because rules vary by state, some may allow the full deduction as it existed prior to the TCJA, while others have specific limitations. Taxpayers must check the rules for their state of residence to determine if they can claim a deduction. This information can be found on the state’s department of revenue website or by consulting a qualified tax professional.