Can I Deduct Financial Advisor Fees?

Many people who pay for professional financial guidance wonder if those costs can lower their tax bill. The fees paid for investment advice, retirement planning, and overall financial strategy represent a significant outlay for many households. The rules governing these deductions have changed in recent years, making it important for taxpayers to know where they stand.

The General Rule for Individuals

For most individual taxpayers, financial advisor fees are not deductible on federal income tax returns. The Tax Cuts and Jobs Act of 2017 (TCJA) suspended a category of deductions known as miscellaneous itemized deductions. This suspension is currently in effect for tax years 2018 through 2025. Taxpayers who itemize deductions using Schedule A of Form 1040 will find there is no longer a line for these types of expenses.

Before the TCJA, taxpayers could deduct the portion of their investment advisory fees that, when combined with other miscellaneous expenses, exceeded 2% of their adjusted gross income (AGI). These fees were claimed on Schedule A. The TCJA eliminated this entire category of deductions for individuals, so the costs for personal investment management, financial planning, and wealth management services are now paid with after-tax dollars without a corresponding federal tax benefit.

For example, if a taxpayer with a $200,000 AGI paid $5,000 in advisor fees, they previously could have potentially deducted $1,000 of that fee (the amount exceeding the 2% AGI threshold of $4,000). Under current law, none of that $5,000 fee is deductible on their federal return.

Deductibility for Business and Investment Properties

An exception to the general rule applies to financial advisory fees that are directly related to a business or an investment property. These costs are not considered personal investment expenses but rather ordinary and necessary business expenses. They can be deducted against the income generated by the business or property. This deduction is not taken on Schedule A but on the tax form associated with the specific business activity.

For a sole proprietorship, these fees would be reported as an expense on Schedule C (Form 1040), Profit or Loss from Business. Farmers can deduct qualifying fees on Schedule F (Form 1040), Profit or Loss From Farming. For owners of rental real estate, advice pertaining specifically to the management and financing of their rental properties can be deducted on Schedule E (Form 1040), Supplemental Income and Loss. For instance, if an advisor charges a fee for helping a real estate investor restructure the financing for their portfolio of rental units, that fee is a deductible expense against the rental income.

When an advisor’s fee covers both personal and business assets, taxpayers must keep detailed records that clearly distinguish between the services provided for their personal portfolio and those for their business or rental properties. An advisor’s invoice should ideally separate these charges. The taxpayer must make a reasonable allocation and be prepared to substantiate it if questioned by the IRS.

Deductibility for Trusts and Estates

Trusts and estates operate under a different set of tax rules than individuals, and in some cases, they can still deduct investment advisory fees. Non-grantor trusts, which are treated as separate tax-paying entities, may be able to deduct fees that are necessary for the administration of the trust. These deductions are claimed on Form 1041, the U.S. Income Tax Return for Estates and Trusts.

The distinction lies in whether the expense would have been incurred if the property were not held in a trust or estate. Fees for services that are unique to the administration of a fiduciary account, such as specialized investment strategies required by the trust document or the need to balance the interests of different beneficiaries, may be deductible. If an advisory fee is higher than what would typically be charged to an individual for similar services because of the unique requirements of the trust, the excess amount may be deductible.

Routine investment management fees that would be incurred by any investor are generally not fully deductible, falling under the same limitations that affect individuals. The burden is on the trustee to demonstrate that the fees are a direct result of the trust’s unique administrative needs. Grantor trusts, where the trust’s income is taxed to the creator of the trust, do not receive this same benefit.

Alternative Tax-Advantaged Strategies

Since most individuals can no longer deduct financial advisor fees, some are turning to alternative methods. One common strategy involves having advisory fees paid directly from a tax-advantaged retirement account, such as a traditional Individual Retirement Arrangement (IRA). While this does not create a tax deduction, it allows the fee to be paid with pre-tax dollars.

When fees are paid from a traditional IRA, the money used has not yet been taxed. For example, paying a $3,000 advisory fee from a checking account might require earning $4,000 before taxes (assuming a 25% tax rate). Paying that same fee directly from a traditional IRA uses dollars that have never been subject to income tax.

While federal law changed, some states did not conform to all provisions of the TCJA. A small number of states may still permit the deduction of investment advisory fees as a miscellaneous itemized deduction on the state income tax return. Taxpayers should review their specific state’s tax laws or consult a tax professional to see if this is a possibility in their location.