Currently, as of the writing of this article (tax year 2023), financial planning advisor fees for individuals are NOT tax deductible for US income taxes.
Prior to 2018, investment fees were deductible as a Miscellaneous Itemized Deduction, which means that you would take all your qualifying Miscellaneous items (including financial planning advisor fees), and to the extent they exceeded 2% of your adjusted gross income (AGI) on your tax return, you could deduct the expenses.
The general idea for many of the miscellaneous deductions was that if it was incurred in the production of income that was part of your AGI, then it would qualify for the deduction. In other words, if you incurred investment-related expenses to generate investment income, then it would qualify to be included in the itemized deductions.
Current Rules (2023)
The Tax Cuts and Jobs Act (TCJA) of 2017 updated the tax code which eliminated the tax break for many miscellaneous itemized deductions for tax years 2018 – 2025. This includes financial planning and investment fees.
When preparing your US federal income tax return, the process involves taking the larger of the Standard Deduction or your Itemized Deductions. One big change with the TCJA was that the Standard Deduction was increased substantially, and itemized deductions were reduced. As a result, depending on your situation, your federal tax burden may have improved or worsened as a result of this change.
As you may recall, when it was allowed, you would add up all of your qualifying miscellaneous itemized deductions (including investment advisory fees) and get a total. You would then take your Adjusted Gross Income from your tax return and multiply it by 2%. To the extent your miscellaneous expenses exceeded that 2% number, you could add that as an itemized deduction. If you itemized deductions in total (mortgage interest, property taxes, miscellaneous itemized deductions, etc) were greater than the standard deduction you would then take that itemized total (from Schedule A Form 1040) and deduct that against your ordinary income.
If you want additional information on what is an allowable and unallowable miscellaneous deduction by year, please see this Publication 529 page of the Internal Revenue Service.
Regardless, you can no longer specifically deduct financial planning advisor fees on your personal return to reduce taxable income, until either the tax code changes again or the current TCJA sunsets at the end of 2025. It is possible that in future years this deduction could come back again.
Paying Advisor Fees right from your retirement account
One technique advised by some is to pay advisory fees related to your traditional IRA, directly from your IRA. This is considered to be a kind of tax deduction because you are paying with pre-tax dollars. It is something to consider.
I am personally not a fan of that technique. From my point of view, it is letting the tax tail wag the investment dog.
Fees are one of the biggest drags on your ability to achieve compound investment returns over time. I would personally rather bite the bullet and pay for the fees out of pocket with after tax dollars and preserve the pre-tax investment dollars so they can grow and compound to much bigger numbers over time.
Regardless, this is a personal choice and you should discuss options with your tax advisor. If you decide to go that route, the investment firm should be able to code the IRA withdrawals of those funds to pay the fees from the traditional IRA properly so that it is not considered a distribution subject to income and an early withdrawal penalty. You can’t pay all the fees from all accounts out of your traditional IRA, just the portion of the fee that relates to the traditional IRA.
Since a Roth IRA is already funded with after-tax dollars there would be no immediate tax benefit to paying the fees directly from a Roth account.
Some states have adjusted state tax law as a result of the TCJA mentioned above. For example, the state of New York allows taxpayers to itemize their deductions for state tax purposes even if they are using the standard deduction for federal purposes. What this means is that these types of miscellaneous deductions may be available at the state level in some cases. You should check with your state department of revenue to verify what is allowed. So, even though no federal tax benefit exists at this time, there could be a state opportunity.
Other Tax Strategies
Another common technique to reduce taxes involves taking advantage near the end of the year by “tax loss harvesting” investments in taxable accounts. In order to realize a loss you need to sell the investment. You can do this by selling some of the losing investments and taxing the loss tax deduction. You do need to be careful of the “wash sale rules” when doing this, which generally means you can’t buy back the same (or very similar) investment in the next 30 days. This strategy may or may not fit in your investment plans but it is one worth considering each year depending on your circumstances at that time.
Financial advisor fees would typically be charged via a flat or hourly fee (fee only) or based as a percentage of assets under management (AUM). The fees would cover a range of services including retirement and estate planning, investment management and advice, as well as tax strategies and general financial advice. Fees matter. As my dad always said, why spend a dollar to save 30 cents? If you can lower your fees, you are saving the taxes and then some! See this article on Fee Only vs Fee Based Financial Advisors for more information.
- As of the writing of this article (2023), investment and related expenses are NOT deductible for US income tax purposes
- This deduction was removed as part of the Tax Cuts and Jobs (TCJA) Act effective for years 2018 – 2025
- One technique used by some is to pay the applicable investment expenses directly from their pre-tax traditional IRA account
- Some states decoupled from the TCJA and allow certain itemized deductions for state taxes not currently allowed by the Internal Revenue Code for federal tax purposes
- Other tax savings strategies such as Tax Loss Harvesting are still available, and should be part of your annual investment review process
- Fees Matter and have a big impact on the compounding of investment returns over time. If you don’t have the fee you don’t need to worry about a tax deduction on the fee!
Other Articles to Read
- Questions to Ask your Financial Advisor each year
- Difference of a Fee Only vs Fee Based Financial Advisor
- Employee Guide to Taxable Employee Mileage Reimbursement
- Yes you Can do better than a 4% Safe Withdrawal Rate
- How is Truflation different than the CPI index?
- Use the Longevity Illustrator to Plan Your Retirement
- The Pension Rights Center Provides Retirement Assistance
- Do I pay taxes on stocks even if I don’t sell them?
- When does Fidelity send tax forms for investments?
- Do Trusts need a separate tax ID number?