fees tax deductible?

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jeno1000's picture
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Joined: 2006-10-11

hiis it true that fees charged in a fee based account are tax deductible...i am primarily transaction oriented right now and am considering going indy and fee based. Would i need to send my fee based clients a tax form for that purpose..i sell bonds for a living...curently bond mark ups are not disclosed hence my clients do not deduct commissions but i think it would be a great help in transitioning clients if i can pitch them tax deductibility of fees while indy{in a fee based structure}any thoughts....

skeedaddy2's picture
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Joined: 2005-09-14

Many investment expenses (such as legal and professional fees, fees for
investment advice, fees for tax preparation/advice, investment and/or tax
books, magazines, subscriptions, safe deposit box fees, IRA custodial
fees, certain investment travel expenses, and certain investment
entertainment expenses) can be deducted as a miscellaneous itemized
deduction on Schedule A. Check out IRS Publication 550.

Margin interest is also a recognized expense..but the rules can get pretty
complicated, so make sure to check out IRS Form 4952.

My out of town clients also expense travel and lodging when they visit
South Florida, even if they don't stop by to see me.

rightway's picture
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Joined: 2004-12-02

skeedaddy2 wrote: Many investment expenses (such as legal and professional fees, fees for
investment advice, fees for tax preparation/advice, investment and/or tax
books, magazines, subscriptions, safe deposit box fees, IRA custodial
fees, certain investment travel expenses, and certain investment
entertainment expenses) can be deducted as a miscellaneous itemized
deduction on Schedule A. Check out IRS Publication 550.

Margin interest is also a recognized expense..but the rules can get pretty
complicated, so make sure to check out IRS Form 4952.

My out of town clients also expense travel and lodging when they visit
South Florida, even if they don't stop by to see me.

Good post.  Deductions are subject to limitiations (as a % of AGI,
balanced against dividends, etc...) and a good advisor will OWN these
tax regs as they pertain to the fee's they charge.

troll's picture
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Joined: 2004-11-29

jeno1000 wrote:hiis it true that fees charged in a fee based account are tax deductible...i am primarily transaction oriented right now and am considering going indy and fee based. Would i need to send my fee based clients a tax form for that purpose..i sell bonds for a living...curently bond mark ups are not disclosed hence my clients do not deduct commissions but i think it would be a great help in transitioning clients if i can pitch them tax deductibility of fees while indy{in a fee based structure}any thoughts....
Indirectly your clients do deduct your comissions as they are incorporated in their cost basis or sale proceeds.....My original understanding was that management fees were not deductible, although I did know some more aggressive(and frankly ignorant) accountants who deducted them on their client's itemized return.....Take that for what it's worth!

rightway's picture
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Joined: 2004-12-02

joedabrkr wrote:
jeno1000 wrote:hiis it true that fees charged
in a fee based account are tax deductible...i am primarily transaction
oriented right now and am considering going indy and fee based. Would i
need to send my fee based clients a tax form for that purpose..i sell
bonds for a living...curently bond mark ups are not disclosed hence my
clients do not deduct commissions but i think it would be a great help
in transitioning clients if i can pitch them tax deductibility of fees
while indy{in a fee based structure}any thoughts....
Indirectly your clients do deduct your comissions as they are incorporated in their cost basis or sale proceeds.....My
original understanding was that management fees were not deductible,
although I did know some more aggressive(and frankly ignorant)
accountants who deducted them on their client's itemized return.....Take that for what it's worth!

Learn the tax law.  You can deduct management fee's, with limitations.

As usual though, you have a good point...commissions are built into
basis, which in many cases is better than trying to deduct fees.

troll's picture
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Joined: 2004-11-29

rightway wrote:
joedabrkr wrote:
jeno1000 wrote:hiis it true that fees charged
in a fee based account are tax deductible...i am primarily transaction
oriented right now and am considering going indy and fee based. Would i
need to send my fee based clients a tax form for that purpose..i sell
bonds for a living...curently bond mark ups are not disclosed hence my
clients do not deduct commissions but i think it would be a great help
in transitioning clients if i can pitch them tax deductibility of fees
while indy{in a fee based structure}any thoughts....
Indirectly your clients do deduct your comissions as they are incorporated in their cost basis or sale proceeds.....My
original understanding was that management fees were not deductible,
although I did know some more aggressive(and frankly ignorant)
accountants who deducted them on their client's itemized return.....Take that for what it's worth!

Learn the tax law.  You can deduct management fee's, with limitations.

As usual though, you have a good point...commissions are built into
basis, which in many cases is better than trying to deduct fees.
Again my info may be dated, but it was my understanding that for 'fee in lieu of commish' accounts, the fee should actually be allocated to the basis of the securities in the account on a prorated basis.  Obviously, for anyone who understands it, this is a HELLISHLY COMPLEX calculation and record keeping nightmare.....

Captain's picture
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Joined: 2006-04-07

To complicate matters a bit more...

Investment management fees associated with the mangement of tax
exempt bond portfolios is not tax deductible.

I'd argue with the thought that the tax deductibility is better when
allocated to basis (through commissions) rather than through advisory
fees. Advisory fees are deductible against ordinary income, where
commissions offset capital gains, which are taxed at a lower rate. That
being the case, you get more tax deduction for each $1 charged in
advisory fees, rather than $1 added to the basis of the stock you
purchased through a commission-based account. The caveat is that the
advisory fees must satisfy the 2% of AGI before the deduction can be
taken.

I would say, concerning the original post... Good for you. If you have a
knack for the management of bond portfolios, a fee-based RIA would be
a great solution. You can execute block trades of bonds, allocate them to
client accounts, and have a great, low-cost bond portfolio for 50 bps per
year. I'll bet you'll do a better job for your clients, and make more money
for yourself.

Good cheer.

C

Captain's picture
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Joined: 2006-04-07

A small replay for grammatical purposes...

"To complicate matters a bit more...

Investment management fees associated with the mangement of tax
exempt bond portfolios ARE not tax deductible."

If my mother saw my opening to my post, she would not be happy.

C

Dark Knight's picture
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Joined: 2008-01-30

To revive an old but valuable post,
 
does anyone know what happens to the first 2%(of AGI) of Investment fees that aren't deductible?  Is there any place that these can be claimed or used?     

Morphius's picture
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Joined: 2007-07-21

They are exiled to the land of non-deductible expenses where they die a slow, painful death.

Dark Knight's picture
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Joined: 2008-01-30

Well, that hampers the value of the deductibility quite a bit then.

Greenbacks's picture
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Joined: 2004-12-21

Years ago at a  CPA firm I was at. The wirehouse reps would call us up and claim there clients could write the fees off. They could not understand the 2% limitation or they where blindly led or misunderstood what there masters had told them.  

Morphius's picture
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Joined: 2007-07-21

Dark Knight wrote:Well, that hampers the value of the deductibility quite a bit then.Rumor has it the tax code was not written to maximize the value of deductions. 

Captain's picture
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Joined: 2006-04-07

Don't forget to have your clients remit fees for Roth IRA accounts separately. At least at that point, your client will have the benefit of not having their Roth IRAs reduced by your management fee each year. Same goes for IRA accounts.

It's like having the ability to make an additional contribution to your Roth IRA/Regular IRA each year.

I defer to the accountants, however, I believe that if you remit the fee separately, you can also deduct the fees (again, subj. to the 2% AGI requirement).

Good times.

C

Captain's picture
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Joined: 2006-04-07

I also know that 'fee-in-lieu of commission' accounts do not necessarily allow you to deduct the fees paid. The fees are treated as commissions and are allocated to the basis of the stocks, and not a write-off against income.

So, if your firm offers both types of accounts, be sure that your clients are provided with the proper advice (through their accountant, of course) whether or not they can take the deduction, or allocate the fee to increase basis.

C

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