Investment Expenses & Fees

[Burke]

I know you have to adjust investment mgmt. fees based on taxable/tax-exempt investments. Is it based on the income each year from each? Or the percentage of the investments themselves? I am thinking income.

[BHoffman]

From Pub 550:

"Expenses for both tax-exempt and taxable income. You may have expenses that are for both tax-exempt and taxable income. If you cannot specifically identify what part of the expenses is for each type of income, you can divide the expenses, using reasonable proportions based on facts and circumstances. You must attach a statement to your return showing how you divided the expenses and stating that each deduction claimed is not based on tax-exempt income.
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 this proportion. To find the part of the expenses that is for the tax-exempt income, divide your tax-exempt income by the total income and multiply your expenses by the result.
Example.

You received $6,000 interest; $4,800 was tax-exempt and $1,200 was taxable. In earning this income, you had $500 of expenses. You cannot specifically identify the amount of each expense item that is for each income item, so you must divide your expenses. 80% ($4,800 tax-exempt interest divided by $6,000 total interest) of your expenses is for the tax-exempt income. You cannot deduct $400 (80% of $500) of the expenses. You can deduct $100 (the rest of the expenses) because they are for the taxable interest."

[FEDUKE404]

The winner is. . .INCOME!

I know you have to adjust investment mgmt. fees based on taxable/tax-exempt investments. Is it based on the income each year from each? Or the percentage of the investments themselves? I am thinking income.

INCOME is correct.

I've actually seen some brokerage statements that, bless their heart, actually do the allocation calculations for you.

FE

[Snaggletooth]

Deductible at all

Are these fees even deductible at all? It is my understanding that they are a "miscellaneous" Sch A deduction which usually gets wiped out by the 2%. Have I missed something, because I have several clients with fees over $1000.

[FEDUKE404]

Investment fees deductible and common

Are these fees even deductible at all? It is my understanding that they are a "miscellaneous" Sch A deduction which usually gets wiped out by the 2%. Have I missed something, because I have several clients with fees over $1000.

They are indeed a miscellaneous Schedule A, line 23 deduction, subject to the 2% limitation.

However, with the asset-based account management fees (usually assessed quarterly) that many of my clients now have, they still get a nice "additional" Schedule A deduction even after the 2% haircut. Bonus: They (kinda) get to deduct their tax prep costs.

FE

[Lion]

...and safe deposit box and union dues and unreimbursed employee expenses such as publications and... Ask your client some questions to see if they have more Miscellaneous deductions.

[FEDUKE404]

Going through the misc deduction list

...and safe deposit box and union dues and unreimbursed employee expenses such as publications and... Ask your client some questions to see if they have more Miscellaneous deductions.

True dat!!

I actually remember when such questions were routine for all clients, because for NC such items were adjustments to income and could reduce state taxes even without itemizing.

(Well, we also filled out returns by hand and ran some archaic monster known as a "check tape.")

Sometimes good habits are hard to break?

FE

[Burke]

Ah, the old check tape. Wonder if I could still do it as fast as I used to? It really worked quite well.....

[taxea]

Are these fees even deductible at all? It is my understanding that they are a "miscellaneous" Sch A deduction which usually gets wiped out by the 2%. Have I missed something, because I have several clients with fees over $1000.

They should be deducted on the return regardless.

[Rapid Robert]

They should be deducted on the return regardless.

Agree, they might come into play if NII tax is involved, which is independent of Schedule A. Or investment interest expense deduction (to calculate net investment income). Even if taxpayer is below NII threshhold, that might change in event of an amendment. Also, it shows the client you are paying attention.

[Roland Slugg]

INCOME is correct

...with the asset-based account management fees (usually assessed quarterly) that many of my clients now have...

Make up your mind. First you say the allocation should be income based, then you acknowledge that the fees are asset based.

For all the managed accounts I have seen (including two of my own) the fees have been based on the value of the assets in the account, usually at the beginning of the quarter. For such accounts the correct deductible/non-deductible allocation should be based on asset values, not income.

[FEDUKE404]

Deduction of fees versus origination of fees

Make up your mind. First you say the allocation should be income based, then you acknowledge that the fees are asset based.

For all the managed accounts I have seen (including two of my own) the fees have been based on the value of the assets in the account, usually at the beginning of the quarter. For such accounts the correct deductible/non-deductible allocation should be based on asset values, not income.

Well, my mind IS made up. . .

#1: It is my understanding of the tax rules that the later allocation of the charged fees, for tax deduction purposes, is based upon the types/ratios of income for which the asset-based account fees were originally charged.

#2: As a completely unrelated matter, the brokerage firms (to the best of my knowledge) usually charge the client the quarterly asset-based fees based upon the value of the securities (all of them!!) et al in the account on those dates. A few investment firms will take the additional steps to allocate, as a courtesy to the customer, those total fees in a manner consistent with the underlying tax rules applicable to #1 above. Clients and tax preparers generally appreciate this "extra step."

The two issues are totally separate in nature and not quite interchangeable.

FE

[Burke]

I agree. When allocating fees on a 1041 return, it automatically calculates deductible fees based on the taxable vs tax-exempt income for the year on a worksheet you can plainly see, even though these fees are calculated by the custodian based on total assets managed in the fund. They are two separate issues.

[MANDAN]

Make up your mind. First you say the allocation should be income based, then you acknowledge that the fees are asset based.

For all the managed accounts I have seen (including two of my own) the fees have been based on the value of the assets in the account, usually at the beginning of the quarter. For such accounts the correct deductible/non-deductible allocation should be based on asset values, not income.

Once I had a client, he had 700,000 in IRA, the financial planner charge 1% $7000 per year. I asked the financial planner, he told me the fee was taken out from the gross value of the assests, so the taxable amount is already reduced. So he can not deduct the fees on schedule A. I think if the assets was IRA or 401K then you can not deduct the management fees. But if it was just regular investment, then it is deductable on Schedule A.

[Burke]

That is correct. If the investment fees are deducted out of an IRA, then there would be no deduction on the return. Because it does not result in a taxable withdrawal to the TP. Only if the fees are paid in cash from a taxable investment account, or by the TP by check, would they be deductible.