Tax Deductibility of Management Fees

A few questions have come up from clients regarding the tax deductibility of investment management fees paid for ongoing advisory services such as those offered by Pariveda. Here’s a quick overview.

Investment management fees are considered a “below-the-line” miscellaneous expense for the taxpayer and are therefore deductible to the extent that they, combined with all other miscellaneous expenses, exceed 2% of the taxpayer’s adjusted gross income (AGI). The taxpayer is eligible for the deduction regardless of whether the account(s) in question are taxable, tax-deferred, or a combination.

However, in cases where the taxpayer falls under the Alternative Minimum Tax all “below-the-line”, including those for investment management fees, are disallowed.

Until a few years ago, there was confusion surrounding whether advisory fees paid for tax-deferred accounts such as IRAs and 401(k)’s had to paid from funds within the account, or whether these fees could be paid from outside funds, and if so, if these fees would be considered tax deductible. All this was cleared up in a 2005 private-letter ruling:

Advisers say the IRS clarified a gray area when it ruled that a wrap or asset-based fee for an IRA can be paid with outside money - and not run afoul of contribution rules - as opposed to having to be paid with pre-tax dollars from the IRA. The rule also clarified that the wrap fee paid with outside money would be tax deductible.

Interestingly, while advisory fees paid for tax-deferred accounts are deductible, brokerage commissions are not.