Managing your finances often comes with various costs, including investment advisory fees, financial planning charges, and other associated expenses. Taxpayers used to enjoy some relief by deducting many of these costs on their federal tax returns. However, significant changes to the tax code in recent years have altered what’s deductible and what’s not.
Understanding the current IRS rules around investment-related expenses is critical for high-net-worth individuals, retirees, and anyone paying for financial guidance. This detailed blog will walk you through what financial costs can still be deducted, what was eliminated by the Tax Cuts and Jobs Act (TCJA), and how you can still gain tax advantages through alternative strategies.
1. What Were Investment Advisory Fees?
Investment advisory fees refer to the charges you pay to financial professionals who manage your investment portfolios or provide advisory services. These fees are often calculated as a percentage of assets under management (AUM), and may include:
- Ongoing portfolio management fees
- Charges for financial planning services
- Brokerage account maintenance fees
- Custodial and trading platform fees
These expenses, prior to 2018, were considered “miscellaneous itemized deductions” and were deductible to the extent they exceeded 2% of your adjusted gross income (AGI).
2. What Changed Under the Tax Cuts and Jobs Act?
The Tax Cuts and Jobs Act (TCJA), passed in late 2017 and effective from tax year 2018 through 2025, suspended all miscellaneous itemized deductions subject to the 2% AGI floor. This included investment advisory fees, tax preparation fees, and unreimbursed employee expenses.
As a result, taxpayers can no longer deduct investment advisory fees on their federal income tax returns, regardless of the amount or the type of service provided.
3. State-Level Deductions May Still Apply
While federal deductions for investment fees are off the table, some states still allow taxpayers to deduct these expenses. States like:
- California
- New York
- Oregon
- Minnesota
may continue to follow pre-TCJA tax law, at least partially. This means you might still benefit at the state level. Be sure to consult your state’s tax department or a local tax professional for updated information.
4. What Financial Costs Are Still Deductible?
Although most advisory fees are not deductible under current federal rules, certain financial-related expenses may still qualify for a deduction or tax benefit, including:
- Investment interest expense: Interest paid on loans used to purchase taxable investments (reported on Form 4952)
- IRA custodial fees: Only if paid separately (not from the IRA itself)
- Rental property investment expenses: If advisory services directly relate to rental income
- Fees related to taxable trusts or estates: Some administrative fees may still be deductible
It’s important to distinguish between personal financial advice and services related to income-producing property, as only the latter may still have tax-deductible value.
5. What About Retirement Accounts?
Fees paid from within a tax-advantaged account like an IRA or 401(k) are generally not deductible because the account itself is already tax-deferred. However, if you pay certain administrative or investment management fees out-of-pocket (instead of from the account), those used to be deductible as miscellaneous itemized deductions, but now fall under the TCJA suspension.
One workaround: Pay advisory fees directly from the IRA account rather than using taxable dollars. While not deductible, this preserves your cash and does not count as a distribution if properly structured.
6. Structuring Advisory Fees Through Business Entities
If you operate a business or are self-employed, you may be able to deduct financial advice that directly relates to your business operations. For example:
- Advisory services for setting up a SEP IRA or Solo 401(k)
- Financial consultations tied to business planning or succession
- Tax advice for managing business-related capital gains or asset sales
In such cases, the deduction may be taken as a business expense on Schedule C, reducing your self-employment income.
7. Consider Fee-Based vs. Commission-Based Advisors
Since investment advisory fees are no longer deductible for most individuals, some taxpayers consider using commission-based financial advisors instead. These advisors are compensated through brokerage commissions, not direct client fees.
However, this change should not be the sole reason to switch advisor types. Fee-based advisors often provide more comprehensive and objective financial planning. Focus on the value and quality of advice, not just tax treatment.
8. Alternative Tax Strategies for Investors
Even though advisory fees are no longer deductible, investors can still use other strategies to reduce tax liability:
- Tax-loss harvesting: Sell underperforming investments to offset capital gains
- Asset location: Place tax-inefficient investments in IRAs or 401(k)s
- Municipal bonds: Generate tax-free interest income
- Capital gains timing: Hold investments longer than one year to benefit from long-term capital gains rates
These strategies, when implemented properly, may result in greater tax savings than the former deduction for fees.
9. Recordkeeping Still Matters
Even if deductions aren’t allowed at the federal level, it’s still wise to track your advisory and financial expenses:
- Some may be deductible at the state level
- They provide insight into your net investment returns
- They support potential deductions related to trusts, estates, or business income
Save invoices, custodial statements, and documentation from your advisors and platforms.
10. Looking Ahead: Will the Deduction Return?
The current suspension of miscellaneous itemized deductions is set to expire after tax year 2025, unless Congress extends it or makes it permanent. If the old rules return, you may once again be able to deduct investment advisory fees if they exceed 2% of your AGI and you itemize deductions.
Until then, plan as if these deductions will not be available and focus on maximizing your after-tax investment returns through planning, efficiency, and diversification.
Conclusion: Focus on Value, Not Just Deductibility
While it’s disappointing that investment advisory fees and many financial expenses are no longer deductible at the federal level, the quality of financial guidance remains critically important. Rather than chasing tax breaks, work with an advisor who adds real value—through strategy, tax planning, and peace of mind.
Stay informed about changing tax laws, keep records of your expenses, and explore deductions that are still available, especially if you have business income, rental property, or trust arrangements. With a proactive tax strategy, you can continue to grow your wealth and preserve it for the future—regardless of the shifting tax landscape.
