Are Investment Advisory Fees Tax Deductible?

Investors pay fees to financial advisors for managing their investment portfolios, either as a percentage of assets or a flat rate. A common question is whether these advisory fees can lower their annual tax bill. The answer has changed due to recent tax laws, leading to confusion for many individual investors.

The General Rule for Individual Investors

For most individual investors, investment advisory fees are not deductible on federal tax returns. This is a result of the Tax Cuts and Jobs Act of 2017 (TCJA), which suspended the category of miscellaneous itemized deductions through the 2025 tax year. Investment advisory fees, along with costs like safe deposit box rentals, were previously classified within this category.

Before the TCJA, taxpayers could only deduct miscellaneous itemized deductions that exceeded 2% of their adjusted gross income (AGI). For example, an investor with an AGI of $200,000 would have needed to surpass a $4,000 threshold before any deduction could be taken. This 2% floor meant many taxpayers did not benefit even when the deduction was available.

The TCJA’s suspension eliminated this potential tax benefit for those with investment management costs. Under current rules, a fee paid from a taxable brokerage account is a personal investment cost and has no direct impact on your Form 1040 tax calculation. This expense cannot be used to offset taxable income. The suspension is temporary, and the rules may revert to the pre-TCJA framework after 2025 if Congress does not pass new legislation.

Deductibility for Trusts and Estates

An exception to the general rule exists for certain trusts and estates. A trust or estate can deduct the portion of a fee that is incurred specifically because the assets are held in a trust. These are costs that an individual investor would not incur.

For example, if an advisory firm charges an extra fee for special handling related to a trust’s unique fiduciary duties, that incremental cost may be deductible. The base advisory fee that is common for all investors is not deductible.

Business-Related Investment Expenses

Investment-related fees may be deductible when connected to a trade or business. If an operating business, like a C-Corporation, holds an investment portfolio, the advisory fees paid to manage those assets can be deducted as an ordinary and necessary business expense. These costs are reported on the business’s tax return, such as Form 1120.

The investment activity must be part of the business’s operations, not a personal investment portfolio. These fees are not subject to the limitations on individuals because they fall under Internal Revenue Code Section 162, which governs trade or business expenses. The business must demonstrate that the investment management is appropriate for the company.

This principle can also apply to individuals who manage rental real estate. For an expense to be deductible on Schedule E, it must be for managing the rental property itself. While direct property management fees are deductible, deducting advisory fees for a separate investment account is difficult, as the service must be proven to be exclusively for the rental activity.

Alternative Tax-Reduction Strategies

Since individual investors cannot directly deduct advisory fees, other tax-efficient strategies are available. One approach involves having advisory fees for an Individual Retirement Account (IRA) paid directly from the IRA itself. While this is not a deduction, it uses pre-tax dollars within the account to cover the cost, which can be more efficient than using after-tax money from a bank account.

This payment is permissible and does not count as a taxable distribution. However, advisory fees for one account cannot be paid from a different retirement account. For example, paying fees for a taxable brokerage account from an IRA would be considered a taxable distribution.

A separate concept is the investment interest expense deduction. This allows for the deduction of interest paid on money borrowed to make investments, such as a margin loan, not for advisory fees. The deduction is limited to your net taxable investment income for the year and is reported on Form 4952.

Any interest expense that exceeds your net investment income can be carried forward to future years. This deduction was not affected by the TCJA and remains a viable strategy for investors who use leverage.