Are broker advisory fees "deductible"?

wrote

Bragging I see.

Yes, Schedule A, subject to 2% of AGI.

To be deducted as part of your cost basis, the fees have to be related to each sale or purchase. Since they waived those fees, you are stuck with a Schedule A deduction.

Deducted on Schedule A line 23. You need to get TaxCut, quickly.

On Mar 30, 2:39 pm, "Paul Thomas, CPA" >

wrote

Or admitting what a lazy fool I am ;-).

Yes. I just realized that myself. Thanks for the confirmation.

I had thought the Sched A deduction did not apply because the only example in the instructions is "your share of investment expenses of a regulated investment company".

(What is that, by the way? Just curious.)

But after seeing an expanded list in TurboTax, I decided to look at IRS Pub 529 (RTFM!). It says quite clearly "investment fees [...] and other expenses you paid for managing your investments that produce taxable income". Klunk!

By the way, does that mean "that produced taxable income" in the reporting year? Or does it mean "that is might produce taxable income (in some years"?

For example, 2008 was a tough year to produce anything but capital loss. Assuming no net taxable income from investments, does the Sched A line 23 deduction still apply for 2008?

Thanks again for the quick response and confirmation.

in article snipped-for-privacy@d2g2000pra.googlegroups.com, snipped-for-privacy@hotmail.com at snipped-for-privacy@hotmail.com wrote on

3/30/09 5:03 PM:

As you already found out, these fees can be deducted on your schedule A, subject to a 2% haircut. That assumes they are related to the production of taxable income. If some of the account contains tax free investments, some of the fees must be allocated to thos investments and are non-deductible. You can only deduct the fees to the extent of investment income and that is often a problem because qualified dividends don't count. You are already getting a great deal on them. That leaves interest and non-qualified dividends. You can select an option to offset them against capital gains but it does not happen automatically. If you can't deduct them this year, they carry forward into the future.

Some brokers will, on request, give you a special report that allocates the fees to taxable investment transactions that go on your schedule D. This allows you to add to the basis or decrease the sales price for stock sales, a much more useful place to use them.

Finally, fees on an IRA account should be deducted from the IRA and paid with pre-tax money, the ultimate deduction. This even helps you on state taxes in most places.

Uncompensated advice guaranteed correct or double your money back

Frank S. Duke, Jr. CPA Cincinnati, OH USA

I know about the one-time directly-paid charitable deductions allowed from IRAs in recent years.

But are you saying there's a way to pay advisory or other fees relevant to an IRA but paid to advisors outside of the IRA, using money from the IRA -- but somehow do this without withdrawing the money from the IRA and paying income tax on that withdrawal?

Wow! Thanks for all the details. I had no idea it was so complicated. Well, I had my suspicions. Your posting anticipated many of my planned follow-up questions.

I do not see any of this in the instructions for Sched A or in Pub 529. Where is all this explained for the hapless taxpayer?

Did you purposely omit net cap gains?

Suppose the account has only investments that do not produce interest and non-qual div; they only produce net cap gains in the tax year (not a net loss) due to sales. Are you saying that none of the advisory fees for that account is deductible on Sched A?

How?

Does the carry-over feature apply only to the option to offset capital gains?

(I assume "them" in both exerpts above refers to fees, not interest and non-qual divs.)

And such fees are not deductible on Sched A. Right?

I use TurboTax. It does not hint at any of the details that Frank describes. Are you saying that TaxCut does?

(I realize that your comment was not in response to Frank.)

After inputing the line 23 deduction with a description, TT simply subtracts the 2% AGI amount. No prompts or automatic adjustments for tax-free investment income; no prompts for IRA fees deducted from the IRA, which I assume should be excluded from the deduction. (Right?)

If TaxCut makes this more clear than TurboTax, I will consider TC next year instead of TT. It has always been a toss-up for me. But the TT user interface has certain anomalies this year that I find quite annoying.

in article snipped-for-privacy@news.stanford.edu, AES at snipped-for-privacy@stanford.edu wrote on 3/31/09 12:58 PM:

In my experience, most financial advisors just deduct the fees from the IRAs. Uncompensated advice guaranteed correct or double your money back

Frank S. Duke, Jr. CPA Cincinnati, OH USA

in article snipped-for-privacy@v35g2000pro.googlegroups.com, snipped-for-privacy@hotmail.com at snipped-for-privacy@hotmail.com wrote on

3/31/09 7:06 PM:

I screwed up in advising you. We were talking about investment advisory fees and my mind was thinking investment interest, which is a different animal. Investment interest has lots of options that are not available for fees.

Check out Pub 550 Investment Income and Expenses page 35 and 36 (non-deductible expenses)

Uncompensated advice guaranteed correct or double your money back

Frank S. Duke, Jr. CPA Cincinnati, OH USA

What do you mean "if you can't deduct them this year"?

I can think of 3 reasons you can't deduct them

1) They don't exceed 2% of your AGI 2) You don't have sufficient income so they make a difference 3) AMT

Which of these would allow you to carry them forward? Where is this documented?

I was astonished by Frank's post, but he now says he was confused...

Well, Taxcut got a simpleton like me through it, so I guess it is clearly done. Turbotax sent me a free copy this year; I tried it but didn't like it. On the other hand, TaxCut doesn't do Accrued Bond Interest properly; they take a shortcut that is always wrong, but they (apparently) figure the error is too small to matter. On mine it wasn't and I had to do it all with overrides. Very clumsy. (It assumes that accrued interest is proportioned the same as the interest from that account, which is unlikely to be true except by pure coincidence.)

While some of your details might be wrong, I think you were right about the key take-away, namely the need to prorate the amount of investment advisory fees applicable to taxable income only.

At least that is how I read Pub 550 (see below).

Also, your citation to Pub 550 answered all of my other questions, including some waiting to be posted :-), again if I am reading it correctly.

No other resources have provided this important input. So I would not say you "screwed up" at all. You were just mistaken about __some__ details.

I consider the following Pub 550 to be dispositive, subject to my correct interpretation and application.

Pub 550, "Expenses of Producing Income", pg 35:

"You deduct investment expenses (other than interest expenses) as miscellaneous itemized deductions on Schedule A (Form 1040)."

"To be deductible, these expenses must be ordinary and necessary expenses paid or incurred: [bullet] To produce or collect income [...]."

"The expenses must be directly related to the income [...], and the income must be taxable to you."

"You can deduct fees you pay for counsel and advice about investements that produce taxable income. This includes amounts you pay for investment advisory services."

Pub 550, "Nondeductible Expenses", pg 36 et seq:

"You cannot deduct expenses you incur to produce tax-exempt income."

"If you cannot specifically identify what part of the expenses is for each type of income, you can divide the expenses [...]. You must attach a statement to your return showing how you divided the expenses [...]."

"One accepted method for dividing expenses is to do it in the same proportion that each type of income is to the total income."

"If the expenses relate, in part, to capital gains and losses, include the gains, but not the losses, in figuring the proportion."

Pub 550, "When to Report Investment Expenses", pg 37:

"If you use the cash method to report income and expenses, you generally deduct your expenses [...] in the year you pay them."

Thanks again, Frank, for this valuable pointer. I did not find this information anywhere else.

[Note to moderators: I hope you do not consider those excerpts to be excessively long. I did my best to trim them without altering their meaning out of context. I think they all relate directly to my questions and to Frank's responses. I hope you will agree that they are relevant, informative and educational, subject to any informed responses to the contrary.]

My uneducated guess is that if you paid a fee out of non-IRA funds for advice on how to invest your conventional IRA, that would be deductible with the 2% threshhold thing. That IRA is not tax-exempt, but is rather tax-deferred. While I am not sure, I would be even less sure if that was a Roth IRA we were talking about.

Suppose instead of buying advice, you are paying an annual $50 custodian fee with funds that are not from the IRA.

If you paid that portion of he expense from the IRA, then you could not.

Now let's hope we get some good follow-on.

I wish someone knowledgable would address your comment.

I assumed that advisory fees attributable to income within the IRA are not deductible, even though they were paid from a taxable account.

On the other hand, if they are deductible, the broker's statements for the IRA does not break income down by "taxable" and "tax-exempt". So I don't know how to prorate the advisory fees attributable to the IRA for only "taxable" income, per the requirements of Pub 550.

Moreover, I am a little concerned about including IRA income in the statement that shows the proration, required to be attached to the tax return according to Pub 550, because the numbers would not mesh with 1099s that the IRS received.

Of course, I could turn a blind eye to all of this and simply prorate the total advisory fees based on the percentage of taxable v. total income reported on the

1099s. The "error" would only be discovered in full audit, which is unlikely, I think. (Famous last words!)

But that is baised against me since I try to emphasize tax-exempt investments in the taxable and non-tax-exempt investments in the IRA.

I should probably pay for this advice and file an amended return later, if beneficial. But I would be interested in any feedback from knowledgable people in this forum.

has some info on the topic.In particular the second bullet point seems to refer to IRAs ingeneral, even tho the URL and topic tab would seem to imply the pageis about Roths.

If your broker recommends you to buy or short some muni bonds and sell them later for a capital gain profit, this advice is tax deductible as capital gains are fully taxable.

Thanks for the pointer. Thomas's article is indeed interesting. I printed it and the private letter ruling for future reference. The PLR is useful for its citations to law alone.

Although the PLR does not explicitly say anything about the deductibility of advisory fees for IRAs (and Roth IRAs), it does conclude that the advisory fees relevant to an IRA (or Roth IRA) that are a percentage of the value of the assets in the account and that are paid from funds outside an IRA "will not be deemed contributions" to the IRA, and they are "recurring administrative or overhead expenses incurred in connection with the maintenance of" the IRA.

The PLR further cites Rev Rul 84-146, 1984-2 C.B. 61, which holds that trustee's fees with respect to an IRA "are deductible under section 212 of the Code to the extent they satistfy the requirements of that section" (quoting the PLR, not the Rev Rul).

Since the PLR does not discuss deductibility per se, no mention is made of the need, or not, to prorate the deductible fees based on "taxable" v. "tax-exempt" income in the IRA.

But the PLR does cite 26 USC 212 and part of 26 CFR

1.212-1, in particular section 1.212-1(e).

Section 1.212-1(e) does state that "no deduction is allowable under section 212 for any amount allocable to the production and collection of one or more classes of income which are not includible in gross income".

However, section 1.212-1(a) states that an expense may be deducted under section 212 if, in part, it has been paid or incurred during the taxable year "for the production or collection of income which, if and when realized, will be required to be included income for Federal income tax purposes".

And section 1.212-1(b) states that "[t]he term income for the purpose of section 212 includes not merely income of the taxable year but also income which the taxpayer has realized in a prior taxable year or may realize in subsequent taxable years".

Since generally, distributions from tradition IRAs are included in gross income (except for the return of nondeductible contributions), without regard for the source of income ("taxable" v. "tax-exempt"), I conclude that the entire advisory fee atributable to an IRA can be included in the miscellaneous itemized deduction, subject to the 2% floor.

It should be noted that I am not relying on the PLR for my conclusion, but on my uneducated understanding of the law cited by the PLR. (I am, however, relying on the PLR's summary of the holding of the cited Rev Rul. I do not have ready access to Rev Ruls.)

Contrary and supportive opinions by knowledgable participants would be appreciated.

And thanks again, "DF2", for providing valuable pointers that, together with Frank's pointer to Pub

550, helped me reached my conclusions for the proper tax treatment of the advisory fees for my taxable and IRA accounts.

I've seen arguments and not universal agreement on legal fees to collect social security or social security disability.

Depending on other income and filing status, anywhere from none to

85% of social security income can be subject to tax.