Financial planners offer different fee set-ups for the services they offer. These include commission, a percentage of the value of assets under management (AUM), or fee-only. But are these financial planning fees deductible from your taxes? At one time, they were. But not these days.
A Background on Section 212
The 26 U.S. Code § 212 – “Expenses for Production of Income” was added to the Internal Revenue Code in 1954. This section allowed individuals to deduct “all the ordinary and necessary expenses paid or incurred during the taxable year” that were both involved with producing and/or collecting income. Also allowed under Section 212 was the ability to deduct expenses involved with management or maintenance of property held for income production or those involved with collection or refund of taxes.
In other words, anything you paid to help generate income from investments was considered a valid deduction. If you paid fees to a stock broker for advice, or a financial planner to help build your net worth to handle various goals, then you could claim that expense as a deduction, as long as the itemized expenses exceeded 2% of your adjusted gross income.
Then came the Tax Cuts and Jobs Act of 2017. The goal of this legislation was to help simplify individual income tax preparation. However, the TCJA also eliminated multiple itemized deductions, again in an attempt to simplify the preparation process. Some of those deductions eliminated included those for state and local taxes paid, mortgage interest – and Section 212. That elimination is in place, at least until 2025. For the most part, this means that fees paid to your financial planner can’t be deducted.
But as is the case with many laws and tax rules, there are a few potential workarounds.
From Deductions to Pretax
It’s unknown whether Congress will intervene on or before 2025 to re-establish the parameters of Section 212. But the following suggestions could help potentially reduce tax issues connected with investments and financial planning.
Fees and IRAs
Paying your financial planner’s fees from an IRA account isn’t considered a withdrawal. It is, in fact, an investment expense, meaning you’re technically paying your financial planner with pre-tax dollars. But keep in mind that you can only pay a portion of the fee attributable for that IRA from that specific IRA account.
Mutual Fund Expense Ratios
You can still deduct the interest you pay on investment assets. Furthermore, certain types of investment fees, such as mutual fund expense ratios, are paid for on a pre-tax basis. The expense ratio is taken out of the fund’s income before that income is distributed to you, the shareholder. You pay taxes only on the income you receive after the expense ratio is taken out.
Commissions Related to Trades
If your financial planner works on a commission-only basis, this could be helpful when it comes to reducing your tax burden. This is because commissions on investment transactions decrease your taxable gain (or conversely, increase your loss).
A Helpful Professional
The inability to deduct a financial planner’s fees from your tax return might mean more expense. But don’t use this as an excuse to stop a relationship with your current financial planner, or to seek one out if you should need help. Depending on your circumstances, a financial planner can provide the necessary advice and recommendations to help build your wealth, while potentially minimizing your tax burden.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice, meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.