Are Investment Advisory Fees Deductible

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Rrsp/rrif A Registered Account Fees Are Not Tax Deductible

Which Investment Fees are Tax-Deductible?

Again, the more money you leave in your RRSP, the more money you will have growing thats tax sheltered. You may think it makes sense to pay RRSP fees with a non-registered account. But its not that simple for deciding where to draw RRSP fees.

Think of it this way: If you have a $1,000 fee that you pay from a non-registered or bank account, you will be out that $1,000. Now consider the RRSP, assuming your marginal tax rate is 30%. When you invest $1,000 in a RRSP, you get a tax refund of $300. When you pay the fee from your RRSP, you have effectively only paid $700. Remember, the fee from the RRSP comes out tax free.

This means there is an advantage to paying RRSP fees from a RRSP in the short term, but over the long-term paying from a non-registered or bank account may be better because you have left more money in the RRSP to grow tax sheltered.

Carefully Analyze How To Pay Traditional Ira Fees

Prior to the Tax Cuts and Jobs Act, taxpayers who were eligible to take a deduction for their investment advisory fees were also generally better off paying the fees attributable to their traditional IRAs with outside, taxable funds . Under the old rules, both options allowed pre-tax payments . But using outside funds offered the added benefit of leaving as much as possible inside the traditional IRA growing tax-deferred. Accordingly, it was really only advantageous to pay an IRA fee from the IRA if the fee was not otherwise going to be deductible on its own .

Now, however, when it comes to the payment of traditional IRA fees, theres a balance that must be weighed. Paying the traditional IRA fee with outside funds allows generally pre-tax IRA funds to continue growing tax-deferred. On the other hand, paying the traditional IRA fee from the traditional IRA essentially allows a taxpayer to receive a pseudo-deduction by paying an after-tax bill with pre-tax funds.

So which option should clients pick?

Accordingly, the longer the investors time horizon, the higher the return, and the less tax-efficient their portfolio , the more advantageous it is to just pay the fee from that less-tax-efficient outside account and preserve the tax-deferred compounding IRA.

Commission Options For Hybrid Advisors

For more than a decade, the trend within the financial advice industry has been to move away from commission-centric business models, and towards more fee-centric, primarily AUM-based business models. To that end, many professionals have given up their broker license to go RIA-only, or are planning to make that move in the near future. Many financial professionals, however, continue to work as hybrid advisors, maintaining affiliations with both a broker/dealer and a Registered Investment Adviser.

And ironically, while both the business and regulatory trend has been to move away from commissions and towards fees, for taxable accounts, the Tax Cuts and Jobs Act distinctly favors commissions with respect to tax efficiency of how the client compensates their advisor.

This tax efficiency can manifest itself in several ways. Consider the following example:

For advisors primarily using mutual funds within their models, the transition to a commission-centric, pseudo-deductible model might be even easier. Thats because many mutual funds have different share classes and, all things being equal, a client with a taxable account is better off having their financial professionals compensation arising from taxable-income-reducing 12b-1 fees, rather than via advisory fees.

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When Are Investment Fees Tax Deductible

Subsection 20BB) of the ITA specifies the conditions for evaluating the tax deductibility of an investment charge. A taxpayer may generally deduct fees and the applicable sales tax at a high level.i.e., Goods and Services Tax , Harmonized Sales Tax , and Quebec Sales Tax if such fees are incurred:

  • Compensated for buy/sell advice on specific stocks or for the administration or management of securities held by that taxpayer

A fee-based service provider or corporation whose primary business is to provide buy/sell advice on specific securities or administer or manage securities. Suppose the investment fees are paid to satisfy the requirements. In that case, they will be deductible against any taxable income earned throughout the year. Embedded costs, such as MERs, are deducted by the fund. A mutual fund or segregated fund before payment is distributed or allocated to investors, lowering taxable income for those investors.

When you sell stocks or exchange-traded funds, you dont get to subtract the money you paid for commissions. But when you sell a security, the commission you paid is added to the cost of that security. It means that when you sell a security for more than you paid for it, the commission will be subtracted from the money you make. And when you sell a security for less than what you paid for it, the commission will be added to your loss.

Pay Roth Ira Fees With Outside Taxable Funds

The new tax law

For years prior to 2018, even though taxpayers were generally able to take a deduction for investment management fees, fees attributable to Roth IRAs were not deductible because they were not for the production of taxable income. Just as advisory fees attributable municipal bonds were prohibited from being deducted, so too were the fees attributable to Roth IRAs, as both investments are meant to produce Federally-income-tax-free income, and not taxable income, for which the deduction is allowed.

Nevertheless, to the extent possible, it was still better to pay Roth IRA fees with outside taxable dollars. By doing so , taxpayers were allowing an amount equal to their fee to remain in the Roth IRA, growing tax- and penalty-free, while paying that amount with taxable funds, for which every dollar of future interest, dividends, and capital gains would have otherwise been taxable.

Since the advisory fees attributable to Roth IRAs were never deductible in the first place , the Tax Cuts and Jobs Act did not change the calculus, and it is essentially business as usual. Such fees should continue to be paid with outside taxable funds, not because of the tax treatment of the fees, per se, but simply to allow the maximum amount of money inside the Roth IRA to grow tax-free.

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Transition Your Firms Models To Mutual Funds/etfs

Hybrid advisors and brokers arent the only financial professionals whose clients may be able to benefit from the use of mutual funds, however. For instance, another way that RIAs can help their clients offset the loss of the deductibility of investment advisory fees is to transition their own use of internal model portfolios, or separately managed account models, to being restructured as mutual funds or ETFs.

In other words, rather than XYZ advisory firm having a series of conservative, moderate, and aggressive portfolios, which the advisory firm manages, and from which advisory fees are paid the advisory firm could instead establish its own mutual fund or ETF , and then give clients the option to invest into XYZ Conservative ETF, XYZ Moderate Growth ETF, or XYZ Aggressive Growth ETF.

Of course, this strategy only has the potential to work if the RIA is model-based, or at least is willing to become model-based. Though for a variety of reasons, not the least of which is the ability to scale, a growing number of advisors already run their businesses by placing clients into one or more standardized models.

However, while from a clients point of view, the repackaging of a separately managed account or other model-based investment strategy into a mutual fund or ETF may offer a simple way to pay investment management fees on a tax-efficient basis, there is are several significant challenges on the advisor side of the equation.

What Tax Reform Means For Your Advisory Fee

Fidelity® Portfolio Advisory Services | Service Tip

In an ever-changing economic environment, we want to reach out and help you navigate some recent legislative changes. We know some of our clients pay their advisory fee by check or deduct the fee from a taxable account for the purpose of a miscellaneous tax deduction. The recently passed Tax Cuts and Jobs Act brings forth a wide variety of changes to the US tax code, including eliminating the itemized deduction for advisory fees for the 2018 tax year.

There is no change for those filing 2017 taxes, as investment expenses, like your advisory fees, are deductible as a “miscellaneous itemized deduction” if they exceed 2% of your adjusted gross income .

If you were paying your advisory fee by check or deducting the advisory fee from an alternate account, you may want to consider having your advisory fee debited directly from your managed account. Any questions about how this change may impact your personal tax situation should be directed to a tax professional.

We make it easy to deduct your quarterly fee directly from your managed account or another Fidelity account. The fee will be included in your account statement, allowing for a consolidated view into all of your managed account activity.

If you have any questions for how to change the way you pay your advisory feeor anything else pertaining to your managed accountplease visit us online or call us directly at 800-544-3455.

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Claim Your Investment Fees On Your Tax Return

One tax deduction that is easily overlooked is called carrying charges and interest expenses. Carrying charges are expenses you incur for the purpose of earning investment income, although only expenses for non-registered accounts qualify.

You can report carrying charges and interest expenses on the Federal Worksheet in all provinces except Quebec. For Quebec, report your carrying charges on Schedule N.

What investment fees are tax deductible?

Carrying charges include fees to manage or take care of your investments and fees for certain investment advice1 or for recording investment income.

Are RRSP management fees tax deductible?

No, you cant claim carrying fees for any registered accounts, meaning RRSPs, registered retirement income funds, registered pension plans, segregated funds or tax-free savings accounts.

Are financial planning fees tax deductible?

Amounts paid for financial planning are generally not tax deductible. These include fees paid to an advice-only financial planner . However, if you paid fees on a fee-based investment account that includes financial planning, the fees are generally tax deductible.

What about mutual fund management fees or stock purchases?

Mutual fund management fees are tax deductible in non-registered accounts, but commissions or trading fees to buy stocks and other investments are not tax deductible.

Are fees to complete my income tax return tax deductible?

So What Does This All Mean

Deductible Fees On Investment Accounts

Before the tax code change, you could deduct fees paid for investment advice as miscellaneous expenses on Schedule A of your tax return. The new tax code affects many investors who pay fees for advice based on a percentage of their assets in non-qualified investment accounts. The fees paid for investment advice in qualified plans such as an IRA are paid from the account on a non-taxable basis, so there is no loss of tax benefit for the fees paid from these types of assets, only non-qualified accounts, such as Individual, Joint, TOD and Custodial accounts.

First of all, there were hindrances to getting the tax break anyway. One was that expenses were only deductible to the extent that theytogether with all your other miscellaneous deductions exceeded 2% of a filers income. For example, say that two retirees had income of $150,000, savings of $1 million in non-qualified accounts, and an advisers fee of 1%. In 2017, they could deduct $7,000 of the $10,000 fee because of the 2% threshold. For 2018, they will get no deduction. See our blog post on tax diversification for more.

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Are Investment Fees Tax

    Are brokerage fees tax deductible? Whenever tax season pops up, this becomes a common question people ask their accountants. But, theres no need to rush to your accountant in a panic, well break it down for you right here.

    If youre looking for the quick answer, then it really depends. Some investment fees are tax-deductible, while others arent.

    As for the long answer, keep reading to get the full picture. Lets take a closer look at the various types of brokerage fees, which investment fees you can claim on your tax return, and how to actually go about claiming them.

    In This Article:

      Can You Deduct Investment Advisory Fees If The Fee Is Deducted Directly From The Account Itself

      Yes, as long as the fees didn’t already adjust your basis in your investments. It is a Miscellaneous itemized deduction on Schedule A. Theyare subject to a 2% of Adjusted Gross Income threshold. But, if they arehigh enough and you itemize deductions on Schedule A, it might benefit you.

      To get to the general area to enter those fees: Whileinside the software and working on your return, type investmentexpenses in the Search at the top of the screen . There will be a popup that says Jumpto investment expenses. Select that to get to the generalarea.

      Follow the screens to the one that asks for investment advisorfees and enter it there.

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      Is Investment Advisory Fees Tax

      Before, investment fees and trading commissions were tax-deductible on your annual returns, but that is no longer true. Investment-related tax deductions were among the various deductions abolished by the Tax Cuts and Jobs Act in 2018. Those provisions will expire at the end of 2025, which might restore those tax reliefs in 2026.

      However, in 2017, there were tax deductions on IA fees. You have three years from the day you submitted your tax return to alter it. Or two years from the date you paid any subsequent tax, whichever is later. And, the TCJA gets slated to expire at the end of 2025 unless Congress renews it. You could take a deduction on the investment advisory fees on your tax return only if it has exceeded more than 2% of your adjusted gross income. You can pay investment management fees structured as a percentage of assets straight from your managed IRA account. For example, imagine you have $6 million in an IRA and $2 million in a non-retirement account and pay 1% in fees per year. The $6,000 related to the IRA can get deducted, but the $2,000 associated with the non-IRA account cannot.

      Where Should You Draw Your Rrsp Fees

      Are Financial Advisory Fees Tax Deductible?

      Its complicated, and the answer depends on your marginal tax rate, your expected return, as well as the length of time you plan for the money to be in your RRSP or registered retirement income fund . Often, the longer the time frame you have, the more it could make sense to pay RRSP fees from a non-registered or bank account.

      In the end most people will pay RRSP fees from their RRSP account.

      I should also point out that if you pay TFSA or RRSP fees from a non-registered account, you cant deduct the fees on your tax return.

      It is worthwhile having the fee discussion with your advisor and reviewing which account you should use to pay your fees. But dont get too hung up on it. At the end of the day, where you draw your fees from may make a little difference on your overall investment growth. But there are likely other things you and/or your advisor can do that will have a much bigger impact on your financial growth and stability.

      Allan Norman, M.Sc., CFP, CIM, RWM, is a fee-only certified financial planner with Atlantis Financial Inc. and a fully licensed investment advisor with Aligned Capital Partners Inc. He can be reached at atlantisfinancial.ca or .

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      Embedded Fees And Mers

      Mutual funds and ETFs receive fees that are embedded in the product itself as part of the management expense ratio , which also includes operating expenses and taxes charged to a fund. While these fees dont qualify as a tax deduction, they are deducted by the fund before income is distributed to investors, which reduces the amount of taxable income for the investor.

      While an investors after-tax interest income is the same regardless of the fee type , small differences in their after-tax income may occur when the MER is used to reduce other types of income distributions namely foreign income, Canadian dividends or capital gains.

      Utilize Limited Partnerships To Make Advisory Fees Deductible Again

      Yet another way that financial professionals can try to relieve the burden of the loss of the miscellaneous itemized deduction for their clients advisory fees is to restructure their investment offering as limited partnerships.

      The basic purpose of the structure would be, similar to converting to a mutual fund or ETF, the opportunity to turn a non-deductible advisory fee to the client into a management fee of the investment partnership as an entity, converting a non-deductible fee into a deductible one. And hopefully, at a lower upfront and ongoing cost than the relatively prohibited expense of creating a mutual fund or ETF in the first place.

      However, the limited partnership approach is not without its own challenges. From a regulatory perspective, such investments would almost certainly not be registered securities, which means the partnerships would be treated as private securities, and thus, generally available only to high-net-worth and other accredited investors. More substantively, though, is simply the challenge of legitimately being able to claim management fees of the partnership as an expense beyond just an already-non-deductible advisory fee.

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      Tax Strategies For Investing

      Minimizing your tax liability as an investor can help you keep more of the returns you earn. While financial advisor fees are no longer deductible, there are things you can do to keep your tax bill as low as possible.

      For example, those strategies include:

      • Utilizing tax-advantaged accounts, such as a 401 or IRA to invest
      • Maxing out the annual contribution limits to those accounts to reduce your taxable income for the year
      • Investing in tax-efficient securities, such as exchange-traded funds, inside a taxable brokerage account
      • Diversifying with other tax-efficient investments like real estate that yield depreciation benefits and other tax breaks
      • Holding assets for more than one year to take advantage of the more favorable long-term capital gains tax rate
      • Using tax-loss harvesting strategies to balance capital losses against capital gains

      Tax-loss harvesting can be particularly effective for minimizing the amount of tax you have to pay on investments. This simply involves selling off assets that have underperformed at a loss to help offset any capital gains you may have to report for the year.

      When harvesting losses inside your taxable account, its important to watch out for violations of the IRS wash sale rule, which could cost you tax benefits. The wash sale rule dictates that you cant replace an asset with a substantially similar one for the purposes of tax-loss harvesting either 30 days before or 30 days after selling an asset at a loss.

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