Are Financial Planning Fees Tax Deductible?

The deductibility of financial planning fees is a common source of confusion, as legislative changes have altered the rules. The answer is not a simple yes or no, and the deductibility of these fees depends on a taxpayer’s specific circumstances. The rules for an individual wage earner are different from those that apply to a business owner or a trust, and navigating these distinctions is important for proper tax filing.

The Current Rule for Individual Taxpayers

For most individual taxpayers, the direct deduction of financial planning and investment advisory fees is no longer permitted. This is a result of the Tax Cuts and Jobs Act of 2017 (TCJA), which suspended a category of deductions known as miscellaneous itemized deductions. This suspension is in effect for tax years 2018 through 2025, though Congress could potentially reinstate these deductions after 2025.

Prior to the TCJA, taxpayers who itemized their deductions could deduct the portion of their total miscellaneous itemized deductions that exceeded 2% of their Adjusted Gross Income (AGI). This category was broad and included fees for financial planning, investment management, unreimbursed employee business expenses, and tax preparation fees for personal returns.

The elimination of this deduction means that fees paid for general financial planning, retirement planning, or investment advice for personal portfolios cannot be written off on Schedule A of Form 1040. This change removed a tax break for those who previously qualified.

Deductibility for Business and Investment Activities

While individuals can no longer deduct personal financial planning fees, an exception exists for expenses directly related to a business or a rental real estate activity. These fees can be considered “ordinary and necessary” business expenses and are deductible against the income of that business. This moves the expense from a suspended personal deduction to a business deduction under Internal Revenue Code Section 162.

For a sole proprietor or independent contractor who files a Schedule C, a portion of financial planning fees may be deductible if the advice pertains to the business. This could include guidance on business succession planning or managing business assets. Similarly, an individual who owns rental properties and reports on Schedule E can deduct advisory fees related to the management of those real estate investments. The same principle applies to farmers, who can deduct relevant fees on Schedule F.

A clear allocation of the fees between personal and business-related advice is required. If a financial planner provides comprehensive services, you must obtain an itemized invoice that breaks down the cost attributable to the business or rental activity. This documentation is needed to substantiate the amount claimed, as only the portion directly connected to the business is deductible.

Paying Fees with Retirement Account Funds

A different strategy for handling investment advisory fees involves paying them directly from a tax-advantaged retirement account, such as a traditional Individual Retirement Arrangement (IRA). This action is not a tax deduction, as it does not appear as a line item on a tax return. Instead, the benefit is derived from using pre-tax dollars to cover the expense, which is an efficient alternative to paying with after-tax money.

When fees are paid from a traditional IRA, the funds used have not yet been taxed. The Internal Revenue Service permits this practice without treating the payment as a taxable distribution, provided the fees are for investment advice related to that specific account. The fees paid from the IRA must only be for the management of that IRA’s assets.

This approach is not recommended for Roth IRAs. Since Roth IRAs are funded with post-tax dollars and offer tax-free growth and withdrawals, using these funds to pay fees diminishes the account’s potential for tax-free compounding. Paying the advisory fee for a Roth account with external, taxable funds preserves the full balance of the Roth to grow.

Special Considerations for Trusts and Estates

For trusts and estates, the rules for deducting investment advisory fees have also become more restrictive under the Tax Cuts and Jobs Act. The TCJA’s suspension of miscellaneous itemized deductions applies to trusts and estates just as it does to individuals, so most of these fees are no longer deductible on the trust or estate’s income tax return, Form 1041.

The determining factor for deductibility is whether a cost is unique to the administration of the trust or estate. An expense is deductible only if it would not have been incurred if an individual held the property. Since an individual would commonly pay investment advisory fees, these costs are not considered unique to the trust and are therefore not deductible through 2025.

However, other administrative costs that are specific to a fiduciary arrangement remain deductible. These include expenses such as trustee fees, fiduciary accounting fees, and certain legal fees related to the administration of the trust or estate. Standard investment management fees are not deductible.