Can I Deduct Advisory Fees on My Taxes?

For most individual taxpayers, investment advisory fees are not deductible on federal income tax returns. This change, which began in 2018, significantly altered how these expenses are treated for tax purposes. However, certain situations and entity types still allow for the deduction of advisory fees.

Understanding Current Tax Law for Advisory Fees

Before 2018, individual taxpayers could deduct investment advisory fees as a miscellaneous itemized deduction. This deduction was subject to a 2% adjusted gross income (AGI) floor, meaning only the amount exceeding 2% of the taxpayer’s AGI was deductible. For example, if a taxpayer had an AGI of $100,000, they could only deduct fees that surpassed $2,000.

The Tax Cuts and Jobs Act (TCJA) of 2017 suspended most miscellaneous itemized deductions, effective from tax years 2018 through 2025. This eliminated the ability for individual taxpayers to deduct investment advisory fees. The TCJA also significantly increased the standard deduction, leading fewer taxpayers to itemize deductions.

As a result of the TCJA, expenses such as investment advisory fees, tax preparation fees, and unreimbursed employee expenses are no longer deductible for most individuals. This legislative change aimed to simplify the tax code. Unless new legislation is enacted, this non-deductibility is set to continue through at least the 2025 tax year.

Situations Where Advisory Fees Remain Deductible

While the general rule is that individual taxpayers cannot deduct advisory fees, specific exceptions exist. Fees directly related to a trade or business can still be deducted as ordinary and necessary business expenses. This applies to financial planning and investment management services for sole proprietorships, partnerships, or S corporations.

Trusts and estates may also deduct certain administration fees, including investment management fees. These fees are deductible if they are “paid or incurred in connection with the administration of the trust or estate and would not have been incurred if the property were not held in such trust or estate.” This means fees unique to the administration of a trust or estate, rather than those commonly incurred by an individual, can be fully deductible.

Tax preparation fees are another category often confused with investment advisory fees. While personal tax preparation fees are generally not deductible for most individuals due to the TCJA, fees related to preparing a business tax return remain deductible. This includes costs for professional tax preparers or tax software used for business-related tax forms.

Reporting Deductible Advisory Fees

For business-related advisory fees, sole proprietors report these expenses on Schedule C (Form 1040), Profit or Loss from Business. Partnerships and S corporations report such deductions on their respective business tax forms, such as Form 1065 (U.S. Return of Partnership Income) or Form 1120-S (U.S. Income Tax Return for an S Corporation). These deductions reduce the business’s taxable income.

Trusts and estates report their deductible administration fees on Form 1041, U.S. Income Tax Return for Estates and Trusts. This form is used to report the income, deductions, gains, and losses of the estate or trust. Deductible fees, such as those for investment management unique to the trust’s administration, are subtracted from the gross income of the estate or trust.

Tax preparation fees that are deductible for business owners are also reported on the relevant business schedules. For sole proprietors, this means deducting the business portion of tax preparation fees on Schedule C (Form 1040), typically as a legal and professional service expense. While personal tax preparation fees are generally not deductible for individuals who itemize on Schedule A (Form 1040), the increased standard deduction under the TCJA means fewer taxpayers find it beneficial to itemize personal deductions anyway.