As you may or may not know, in addition to financial planning and investment management we also prepare taxes. It is our goal to be comprehensive in our planning and taxes play a big part. During a recent phone conversation with a client I was asked if our management fees are deductible. Yes, they are but like with most tax questions, it also depends on your personal circumstances.
Financial Planning and Investment Management fees are a tax-deductible expense and are listed on your schedule A. Just like your tax preparation fees, they would be listed under "Other Expenses" on line 23. These fees are added to your Unreimbursed Employee expenses (work related travel, union dues, education, tools, subscriptions to professional journals etc.) and other miscellaneous deductions. This total must be above 2% of your adjusted gross income (AGI). If they are, everything above 2% of your AGI is deductible, and if not, none of the expenses are deductible. Your AGI can be found on line 38 of your 1040.
Even if you are not able to deduct your financial planning fees on your tax return, you can still pay a portion of the fee with pretax dollars; saving you money in the same way a tax deduction would.
As a fee-only financial advisor our fee is based on a percentage of assets under management. We prorate our fees back to the account we manage. With traditional IRA accounts, the fee is not considered a withdrawal and therefore is not a taxable event. Thus this fee is being paid with pretax dollars so the cost is discounted to clients by their marginal tax rate. The caveat is you are only able to pay the fees related to that account. In the case of a taxable brokerage account the fees cannot be paid from the IRA. Those fees have to be paid directly from the brokerage account with after-tax dollars.
Any management fees paid directly from an IRA account should not be listed as a miscellaneous expense on Schedule A. This is because they are pre-tax dollars and you already received the benefit by receiving a deduction when your money went into the IRA. Only expenses paid from a taxable account should be listed as a miscellaneous expense, subject to the 2% floor of AGI.
So, while no one likes to pay fees, using a Fee-Only advisor allows you to pay them strategically to get the most tax benefit. This is all part of a comprehensive financial plan.