Investment Expense Fees Capped

[taxriv]

When I enter the fees my client pays his broker for handling his investments (15K !), my software wants to create a 4952 even though these fees are not literally investment interest expense. Does anyone believe that, other than the 2% of AGI, that the deduction should be capped in any way by any of the investment income?

[FEDUKE404]

Investment interest vs expenses

When I enter the fees my client pays his broker for handling his investments (15K !), my software wants to create a 4952 even though these fees are not literally investment interest expense. Does anyone believe that, other than the 2% of AGI, that the deduction should be capped in any way by any of the investment income?

The only thing that goes on Form 4952 is investment interest. The deductibility of qualifying investment interest is limited to the amount entered on the form or the amount of qualifying investment income (you will need to look up the definition) actually received. Disallowed investment interest can be carried forward until used.

Fees "for handling his investments" always go to line 23 of Schedule A, and are limited to the 2% AGI floor for the amount that may be deducted.

These two investment costs are totally different in both concept and tax treatment.

FE

[TAXNJ]

Broker/Advisors fees depends on type

If I read the TAXBOOK correctly (maybe wrong) as it applies to these type of fees:

Broker/Advisors fees I think is added to,the basis of the investment.

IRA Broker/Advisors fees if paid separately (not within)from the IRA account may be deductible

Broker/Advisors fees To collect interest and/or dividends may be deductible

[FEDUKE404]

Investment expenses

If I read the TAXBOOK correctly (maybe wrong) as it applies to these type of fees:

Broker/Advisors fees I think is added to,the basis of the investment. see below

IRA Broker/Advisors fees if paid separately (not within)from the IRA account may be deductible correct, subject to 2% AGI floor

Broker/Advisors fees To collect interest and/or dividends may be deductible correct, same as above

Your first comment is a bit unclear to me. Normally that applies to a 1:1 expense related to an investment purchase/sale, aka brokerage fees. Those are obviously considered upon purchase/sale. But I have many clients who pay only a quarterly asset-based fee (and get "free" transactions) so their fees go straight to miscellaneous deductions.

One caveat as you research the rules: If tax-exempt income is involved, you have to put in a fudge-factor adjustment for any fees. As an extreme example, management fees for an account with only muni bond assets/income may have fees, but they are not deductible. Something along the lines of "can't have your cake (tax-free income) and eat it too (deduct expenses for same)"

FE

[TAXNJ]

Let me try to be clearer with a reference

Thanks for the comment:
When you say “But I have many clients who pay only a quarterly asset-based fee (and get "free" transactions) so their fees go straight to miscellaneous deductions.” if you can list your reference it would be appreciated. Because reading below it says "Exception: Fees paid to buy investments
must be added to the basis of the investment property."


Let me try to be clearer with a reference from The Tax Book section 4-28:
"• Fees to a broker, bank, trustee, or similar agent to collect taxable
interest and dividend income. Exception: Fees paid to buy investments
must be added to the basis of the investment property.
• Investment expenses of a regulated investment company.
• IRA trustee fees, if separately billed and paid from funds that
are not inside the IRA.
• Safe deposit box rental to store investment items and documents."

[MRPLOW]

Your first comment is a bit unclear to me. Normally that applies to a 1:1 expense related to an investment purchase/sale, aka brokerage fees. Those are obviously considered upon purchase/sale. But I have many clients who pay only a quarterly asset-based fee (and get "free" transactions) so their fees go straight to miscellaneous deductions.

One caveat as you research the rules: If tax-exempt income is involved, you have to put in a fudge-factor adjustment for any fees. As an extreme example, management fees for an account with only muni bond assets/income may have fees, but they are not deductible. Something along the lines of "can't have your cake (tax-free income) and eat it too (deduct expenses for same)"

FE

I know exactly what FEDUKE is talking about.

These aren't fees paid to buy/sell a specific investment, there quarterly management fees charged to handle all of the clients financial planning needs. Usually based on the value of the account.

[Burke]

Agreed. And they go on Sche A subj to 2% after adjusting for the percentage of tax-frees in the account. They are not fees paid to anyone to collect div/int income.

[FEDUKE404]

Thanks for the comment:
When you say “But I have many clients who pay only a quarterly asset-based fee (and get "free" transactions) so their fees go straight to miscellaneous deductions.” if you can list your reference it would be appreciated. Because reading below it says "Exception: Fees paid to buy investments must be added to the basis of the investment property."

Let me try to be clearer with a reference from The Tax Book section 4-28:
"• Fees to a broker, bank, trustee, or similar agent to collect taxable interest and dividend income. Exception: Fees paid to buy investments must be added to the basis of the investment property.
• Investment expenses of a regulated investment company.
• IRA trustee fees, if separately billed and paid from funds that are not inside the IRA.
• Safe deposit box rental to store investment items and documents."

As good as it may be, TTB is not the final determinant of tax guidelines.

The referenced client pays a fee based on the value of the assets in the account. The statement will show something like "2nd quarter advisory fee" with the amount being several thousand dollars each time. Client's stockbroker confirmed there are zero transaction costs when stocks are bought/sold, and there are a large number of transactions during the year. Many/most of the investors with his firm have such an arrangement, and he was somewhat surprised at my question. Comment by the stockbroker, albeit not a "tax person," was that it was his understanding the fees were deductible when paid and have nothing to do with cost basis issues. He did state, as you should already know, that any "fees" within certain accounts cannot be used as an itemized deduction.

Whether investment costs paid via such an arrangement are, perhaps, a clever way to indirectly "deduct" brokerage fees is a different topic. But that answer changes nothing. Heck, think of all the folks who routinely deduct as "mortgage interest" the finance charges on their new car via a home equity loan and Form 1098. . .

My client also pays similar (smaller) fees within an IRA account, and those quarterly fees are *NOT* included on Schedule A. (Yes, it got sticky because the client's prior tax person HAD routinely also deducted similar fees for the separate IRA account. )

I guess my direct answer to your TTB dilemma is my client pays no "fees to buy investments," therefore any cost basis issues are completely moot.

FE

[Burke]

When TTB refers to "fees to buy investments" it is referring to what we usually call commissions charged by a stockbroker when stocks are purchased/sold, and almost all brokerages reflect these in the cost basis/sales prices reported on the 1099-B. They are not the fees we are talking about here. These are management fees, not commissions on transactions.

[Roland Slugg]

I have long believed that the fees charged by brokers for "managed" accounts, typically running between 2% and 3% per year and billed/deducted quarterly, can be capitalized, at the election of the taxpayer, as "carrying charges" under Code §266 and Regs §1.266-1(b)(1)(iv) in particular. I have even done this for my own investments, but I have never done it for a client.

Why not? It's time consuming, labor intensive work, requiring a spreadsheet designed and set up to make allocations of the annual fees in some fair and ratable manner among all the investor's securities. It just isn't practical to do that for very many clients, and few would have the willingness or ability to do it for themselves. For someone who's paying $15K per year, though, it might very well be a cost-effective endeavor, and anyone who pays sufficient fees to justify the cost and effort do this, and who would otherwise not benefit from a deduction of the fees, due to the 2% haircut, should consider it.

[ttbtaxes]

Investment fees are deductible pursuant to Reg 1.1.67-1T(a)(1)(ii) and Reg 1.212-1(g).

[TAXNJ]

Impressive comments - thanks

Great comments by all and after further research based on the comments, and if the proper information is provided by the brokerage firm, the following applies:

Source: IRS publications
Fees to buy or sell. You cannot deduct a fee you pay to a broker to acquire investment property, such as stocks or bonds. You must add the fee to the cost of the property. See Basis of Investment Property in chapter 4.
Investment counsel and advice. You can deduct fees you pay for counsel and advice about investments that produce taxable income. This includes amounts you pay for investment advisory services.

Great comments as follow by:
BURKE
When TTB refers to "fees to buy investments" it is referring to what we usually call commissions charged by a stockbroker when stocks are purchased/sold, and almost all brokerages reflect these in the cost basis/sales prices reported on the 1099-B. They are not the fees we are talking about here. These are management fees, not commissions on transactions.

FEDUKE404
Agree and often told as FEDUKE404 comments “Comment by the stockbroker, albeit not a "tax person," was that it was his understanding the fees were deductible when paid and have nothing to do with cost basis issues. He did state, as you should already know, that any "fees" within certain accounts cannot be used as an itemized deduction.”

ttbtaxes (source provided)
Investment fees are deductible pursuant to Reg 1.1.67-1T(a)(1)(ii) and Reg 1.212-1(g).

[Burke]

When I enter the fees my client pays his broker for handling his investments (15K !), my software wants to create a 4952 even though these fees are not literally investment interest expense. Does anyone believe that, other than the 2% of AGI, that the deduction should be capped in any way by any of the investment income?

Check with someone who uses your software. Perhaps it is just a matter of the info being entered into the wrong place.

[FEDUKE404]

Data entry point

Check with someone who uses your software. Perhaps it is just a matter of the info being entered into the wrong place.

AGREED.

Sounds as if the entry point for the $15k expenses is being attempted on line 14 of Schedule A, instead of the correct entry point on line 23 of Schedule A.

( There is at least some possibility that line 5 of Form 4952 could be adding to the confusion? )

I cannot imagine any quality tax prep software that would be that unclear over the difference . . .

FE

[JT2307]

Advisory fees

So it sounds as though advisory fees would be deductible. My question is there a difference between the management fees and advisory fees I see on the statements. I know it determines how they are paid. I have seen some very large management and advisory fees.