Sec. 212: What Expenses Are Still Deductible?
Understand the tax principles for deducting certain expenses and how recent legal changes have altered what costs are still eligible for a deduction.
Section 212 of the Internal Revenue Code allows individuals to deduct certain expenses incurred to earn income or manage investments. The principle is that the costs associated with generating income should be considered when calculating taxable income. This provision is separate from trade or business expenses and applies specifically to investment and other income-producing activities undertaken by an individual. The code outlines three distinct categories of deductible expenses, which cover a range of activities, from managing a stock portfolio to contesting a tax bill. The expenses must be considered “ordinary and necessary,” meaning they are common and accepted for the type of activity and are helpful and appropriate.
Deductible Expenses for Income Production
Section 212 permits deductions for expenses paid for the production or collection of income, and for costs for the management, conservation, or maintenance of property that is held for the purpose of generating income. For these expenses to be deductible, they must be directly related to producing income that is taxable.
Common examples of these types of expenses include investment advisory and custodial fees. Fees paid to a professional for managing an investment portfolio or fees charged by a bank or brokerage to hold and service income-producing assets like stocks and bonds would fall under this provision.
Another qualifying expense can be the rental cost of a safe deposit box if it is used to store income-producing items. This could include stock certificates, bonds, or other investment documents. The connection must be clear; using the box to store personal jewelry or a will would not qualify. Similarly, certain costs associated with owning rental property, such as advertising for tenants or fees for property management services, are considered expenses for the production of income.
Deductible Expenses for Tax Matters
A separate category of expenses deductible under Section 212 relates to taxes themselves. The code specifically allows for the deduction of ordinary and necessary expenses paid in connection with the determination, collection, or refund of any tax. This provision applies to federal, state, and local taxes.
The most frequent example of a deductible tax-related expense is the fee paid for tax preparation. This includes the cost of hiring an accountant or other tax professional to complete and file an annual income tax return. Taxpayers who use tax preparation software can also deduct the cost of the software license under this rule.
Beyond preparation, costs associated with tax planning and advice are also covered. If a taxpayer pays a fee to a professional for guidance on how to structure transactions to minimize tax liability, that fee can be a deductible expense. Furthermore, expenses incurred during a dispute with a tax authority, such as the IRS, are deductible. This includes legal fees, accounting fees, and other costs related to an audit, appeal, or tax court proceeding.
Limitations and Non-Deductible Items
Significant limitations exist, primarily due to the Tax Cuts and Jobs Act of 2017 (TCJA). The TCJA suspended the deduction for most miscellaneous itemized deductions that were subject to a 2% of adjusted gross income (AGI) floor. This suspension, effective from 2018 through 2025, directly impacts many Section 212 expenses for individuals. As a result, many common investment-related expenses are currently not deductible for most individual taxpayers, including investment advisory fees, custodial fees, and safe deposit box rental fees when claimed as a miscellaneous itemized deduction on Schedule A.
Another limitation prevents the deduction of expenses related to generating tax-exempt income. For instance, if an investor pays a fee to a financial advisor to manage a portfolio consisting solely of tax-exempt municipal bonds, that fee is not deductible. If the portfolio contains both taxable and tax-exempt securities, the fee must be allocated, and only the portion attributable to the taxable investments can be considered for a deduction, subject to other limitations.
Personal expenses are also explicitly non-deductible. Costs for financial planning related to personal goals like retirement or education are not covered by Section 212.
How to Claim Deductions
For the limited Section 212 expenses that remain deductible, the method of claiming them depends on the nature of the expense. The suspension of miscellaneous itemized deductions on Schedule A has shifted where taxpayers report these costs.
Expenses related to rental real estate or royalty income are deducted on Schedule E (Form 1040), Supplemental Income and Loss. Here, a taxpayer would list the gross income from the property and subtract the ordinary and necessary expenses, such as management fees, repairs, and insurance.
If a tax preparation fee is attributable to a business, it is reported on the corresponding business schedule. For a sole proprietor, this would be Schedule C (Form 1040), Profit or Loss from Business. The portion of the fee related to preparing the business part of the tax return is a deductible business expense.