Are Financial Planning Fees Tax Deductible?

The rules governing the tax deductibility of financial planning fees have undergone substantial changes. For most individual taxpayers, fees paid for personal financial planning and investment advice are no longer deductible on their federal income tax returns. This change makes it important to understand the current regulations and the limited circumstances where a deduction may still be available.

The General Rule for Individuals

Prior to 2018, taxpayers who itemized deductions could deduct certain professional fees, including those for financial planning and investment management. These costs were classified as miscellaneous itemized deductions and could be claimed on Schedule A of Form 1040. This deduction was limited, as the total of all miscellaneous deductions had to exceed 2% of the taxpayer’s Adjusted Gross Income (AGI) before any amount could be deducted.

This category of miscellaneous itemized deductions included expenses like unreimbursed employee business expenses and tax preparation fees. The Tax Cuts and Jobs Act (TCJA) of 2017 suspended all miscellaneous itemized deductions that were subject to the 2% AGI floor. This suspension is effective for tax years 2018 through 2025.

This legislation eliminated the primary way individuals could deduct personal financial planning fees. The change was part of a broader tax reform that also nearly doubled the standard deduction, leading fewer taxpayers to itemize. Unless Congress changes the law, individuals cannot deduct fees for personal retirement planning, investment advice, or wealth management through 2025.

Deductible Fees for Specific Income-Producing Activities

While the general rule prohibits deducting personal financial planning fees, exceptions exist for costs directly tied to generating business or rental income. The distinction is whether the advice pertains to a personal financial situation or to a specific income-producing enterprise. If the fees are an ordinary and necessary expense for a business or rental property, they can be deducted on the corresponding tax schedules.

Business Income (Schedule C)

Sole proprietors and independent contractors who file a Schedule C can deduct financial planning fees directly related to their business. For instance, if a business owner pays for advice on managing cash flow, evaluating financing for an expansion, or setting up a company retirement plan, that portion of the fee is a business expense. These costs are deducted directly against business income on Schedule C.

Rental Real Estate Income (Schedule E)

Landlords who report income on Schedule E can deduct fees for advice related to their rental activities. This could include paying a planner to analyze a new property purchase, advise on a 1031 exchange, or develop a financial strategy for the rental portfolio. The fee must be allocated to the rental activity and is deducted against rental income.

Trusts and Estates (Form 1041)

Trusts and estates filing Form 1041 can only deduct administrative costs that are unique to the trust or estate. For investment advisory fees, a deduction is only allowed for the portion of the fee that exceeds what an individual would be charged for the same services. For example, if a bank charges a trust a higher investment management fee than it does individual clients, only that excess amount is deductible by the trust.

Separating Bundled Financial Planning Fees

If an advisor provides services for both personal matters and deductible business or rental activities, the fee is “bundled.” The taxpayer must allocate the fee between the non-deductible personal portion and the deductible business or rental portion. This allocation must be based on a reasonable method, and the taxpayer must be able to substantiate the deductible amount.

An acceptable allocation method can be based on the time the advisor spends on each area. For example, if an invoice shows 40% of the advisor’s time was spent on a client’s Schedule C business, the client could deduct 40% of the total fee. Another basis for allocation is the value of assets under management (AUM) related to each category.

Consider a landlord who pays a $4,000 fee to a planner managing a $700,000 personal portfolio and a $300,000 rental property portfolio. Using an AUM-based allocation, the taxpayer could deduct $1,200 of the fee on Schedule E ($4,000 x [$300,000 rental AUM / $1,000,000 total AUM]). Clear documentation, such as detailed invoices from the advisor breaking down the services, is needed to support the deduction.

Alternative Ways to Pay for Financial Advice

Since a direct tax deduction is unavailable for most individuals, some taxpayers use tax-efficient payment methods. One strategy is having advisory fees paid directly from a tax-advantaged retirement account, like a traditional IRA. While this does not create a tax deduction, it allows you to pay the expense with pre-tax dollars.

When fees are paid directly from a traditional IRA, the payment is not a taxable distribution. This means you use funds that have not yet been taxed to cover the advice for that account. Using pre-tax dollars from an IRA can be more advantageous than paying with after-tax dollars from a bank account.

This strategy is specific to the account being managed; you cannot use IRA funds to pay for advice on a taxable brokerage account. This method is not beneficial for Roth IRAs. Because Roth IRA withdrawals are tax-free in retirement, using those funds for fees reduces the amount of money available for tax-free growth. Paying fees for a Roth account with outside, after-tax funds is the preferred approach to maximize its long-term potential.