By Jay Sanford, Director of Investment Strategy
It is that time of year again and I can’t tell you how many times I get asked if advisory fees are tax deductible. It certainly is a great question given our philosophy at Washington Financial Group is to utilize various tactical strategies that charge advisory fees. Tactical asset management could be costly if it was transaction based given the need to be nimble within different, ever changing market environments. We want our managers to manage, not worry about their transaction fees, so as a whole, our firm charges advisory fees for asset management (offered through LPL Financial, a registered investment advisor).
That said, it is natural that clients would want to deduct these fees on their taxes if they can. I must first preface the answer with our obligatory compliance statement. We are NOT tax advisors and any information you receive from us or other sources should be discussed and reviewed with your tax professional.
We can speak in generalities though, which will get you on your way to being able to make an educated decision on the deductibility of your fees. In general, advisory fees paid in non-retirement accounts (ie. NOT IRA’s, 401ks, etc.) are tax deductible if they, along with other miscellaneous itemized deductions, exceed 2% of the AGI floor set by the IRS. Also, if you pay your advisory fees within your IRAs with non-retirement dollars (ie. let your non-retirement account pay them, or write a check), then those can be lumped into the misc. itemized expenses category as well. If the fees are taken directly from the IRA, they are not included in the misc. itemized category.
Ultimately, your miscellaneous itemized deductions need to exceed 2% of your AGI before they are deductible. Please visit IRS.gov for a list of permissible miscellaneous deductions.
You certainly don’t want to be overcharged on advisory fees in order to reach the 2% AGI threshold, but those with a large inheritance or retirees that are making less money now or those that have large misc. itemized deductions may in fact be able to deduct the advisory fees on their taxes.
No strategy assures success or protects against a loss.