Are Investment Advisory Fees Deductible?

For most individual investors, the ability to deduct investment advisory fees on a federal tax return has been suspended. This change means that fees paid to financial planners, wealth managers, or robo-advisors for the management of personal investment portfolios are not deductible. The rules have significant exceptions, particularly for trusts, estates, and business activities.

The General Rule for Individual Investors

For individuals filing a Form 1040, U.S. Individual Income Tax Return, investment advisory fees are not currently deductible. The Tax Cuts and Jobs Act of 2017 (TCJA) suspended the category of miscellaneous itemized deductions, which was the mechanism through which taxpayers previously claimed these types of expenses. This suspension is in effect for tax years 2018 through 2025.

Prior to the TCJA, these advisory fees were deductible, but with a limitation. A taxpayer could only deduct the portion of their total miscellaneous itemized deductions that exceeded 2% of their Adjusted Gross Income (AGI). For example, a taxpayer with an AGI of $200,000 would have needed to have more than $4,000 in these types of expenses before any deduction was possible.

The suspension covers a broad range of costs related to personal investment management. This includes fees paid directly to a financial advisor for portfolio management, asset allocation advice, and financial planning services. It also includes fees charged by digital investment platforms, often called robo-advisors, and other related costs like fees for investment-related legal or tax advice.

Deductibility for Trusts and Estates

The rules for deducting investment advisory fees for trusts and estates are more complex. The suspension of miscellaneous itemized deductions also applies to trusts and estates, meaning standard investment advisory fees that an individual would incur for portfolio management are not deductible.

However, an exception exists for certain administrative costs. A trust or estate can deduct expenses that would not have been incurred if the property were not held in that trust or estate. For investment advisory fees, this means only the incremental cost of advice unique to the trust’s administration may be deductible. For example, if an advisor charges a higher fee for specialized services required to manage the trust’s assets and balance the interests of different beneficiaries, that excess portion of the fee may be deductible.

When a portion of an advisory fee is deductible under this exception, it is subtracted directly from the trust’s or estate’s income. This reduces the entity’s distributable net income (DNI), which can lower the income tax liability of the trust, estate, or its beneficiaries.

Deductions for Business-Related Investment Advice

Investment advisory fees can be deductible when they are an ordinary and necessary expense of carrying on a trade or business. This rule allows business entities, such as C corporations, S corporations, and partnerships, to deduct fees paid for advice related to managing the business’s financial assets. For example, a corporation might pay a financial advisor to manage its cash reserves or a company-sponsored retirement plan, reporting these costs on a business tax form like Form 1120.

This principle also extends to individuals engaged in specific business activities, most commonly rental real estate. An individual who owns and operates rental properties and reports the income and expenses on Schedule E (Supplemental Income and Loss) can deduct investment advisory fees related to that activity. The advice must pertain specifically to the finances of the rental business.

The distinction is that the expense is tied to a business activity rather than personal investment management. The fees are claimed as a business expense on the relevant business schedule, not as an itemized deduction on Schedule A. This separates them from the suspended miscellaneous itemized deductions.

State Tax Considerations

The treatment of investment advisory fees at the state level varies, as state tax laws do not always align with federal rules. The concept of “conformity” describes the degree to which a state’s income tax laws follow the federal Internal Revenue Code.

Many states automatically conform to changes in the federal tax code, meaning they also disallow the deduction for investment advisory fees. Some states, however, have “decoupled” from specific provisions of the TCJA. In these states, it may still be possible for individual taxpayers to deduct investment advisory fees as an itemized deduction on their state income tax return.

Because the rules vary significantly from one state to another, taxpayers should review the specific laws of the state in which they file. The potential for a state-level deduction means that taxpayers in certain locations might find a tax benefit that is unavailable on a federal return.