Can You Deduct Investments Fees On Taxes? + FAQs

Can investment fees save you money at tax time? It’s a common question for investors and business owners alike 💼. Investment fees – from brokerage commissions and advisor charges to custodial and fund management fees – can add up quickly.

This expert guide breaks down whether you can deduct investment fees under U.S. tax law, how recent tax reforms (like the Tax Cuts and Jobs Act) changed the rules, and what strategies or state-specific nuances might help. We’ll cover individual taxpayers and business entities in detail, with clear examples, pros and cons, and quick answers to FAQs. Let’s dive in!

Understanding Investment Fees (Brokerage, Advisor, Custodial, Fund Fees)

Investment fees come in many forms, and it’s important to know what they are before tackling their tax treatment. Here are the major types:

• Brokerage Fees: These include commissions for buying or selling stocks, bonds, or other investments. For example, a broker might charge a $10 commission per stock trade. Brokerage fees can also include account maintenance charges or transaction fees on your investment account.
• Financial Advisor Fees: If you hire a financial advisor or investment manager (often under a fiduciary standard to act in your best interest), you’ll typically pay an advisory fee. This might be a percentage of assets under management (AUM) – e.g. 1% of your portfolio per year – or a flat or hourly fee for financial planning. These fees are for managing your investments or giving investment advice.
• Custodial and Account Administration Fees: These are charges for account administration or custody of assets. For instance, IRA custodial fees are annual fees some retirement accounts charge for recordkeeping. You might also pay custodial fees for trusts or brokerage accounts that hold securities for you.
• Fund Management Fees (Expense Ratios): If you invest in mutual funds or exchange-traded funds (ETFs), you won’t get a bill for management fees – but they exist. Mutual funds charge an expense ratio that covers the fund’s management and operational costs. For example, a mutual fund with a 0.5% expense ratio effectively takes 0.5% of the fund’s assets each year to pay the fund manager and expenses. This cost is embedded in the fund: it reduces the fund’s returns rather than being billed to you directly.
• Other Investment-Related Expenses: There are other costs investors might incur, such as fees for investment newsletters or research subscriptions, safe deposit box rental (if used to store investment documents or securities), and certain legal or accounting fees related to investments.

Understanding these categories helps clarify which costs we’re discussing. In general, these fees are expenses incurred in order to invest or manage investments. Now, the big question: can you deduct these expenses on your taxes? The answer has changed over time, so let’s start with the way things used to work and how they’ve shifted under current law.

Before TCJA: Investment Fees as Itemized Deductions (Section 212 and the 2% Rule)

Historically, U.S. tax law allowed individuals to deduct many investment-related expenses under certain conditions. IRC Section 212 (a provision of the tax code) permits a deduction for ordinary and necessary expenses paid “for the production of income”. This means that if you spent money to earn investment income – for example, paying an advisor to manage your portfolio – it was considered a legitimate expense in generating taxable income. However, how you deducted these expenses was crucial.

For individual taxpayers, investment fees fell into the category of “miscellaneous itemized deductions” on Schedule A of Form 1040. These were grouped with other expenses like unreimbursed job expenses, tax preparation fees, and hobby expenses. All these miscellaneous deductions were subject to the infamous 2% of AGI rule. This rule meant you could deduct these expenses only to the extent they exceeded 2% of your adjusted gross income (AGI).

• Example (Pre-2018): Suppose your AGI was $100,000 and you paid $3,000 in investment advisory fees and other Section 212 investment expenses during the year. The 2% of AGI threshold is $2,000. In this scenario, the portion above $2,000 – that is, $1,000 – could be deducted as an itemized deduction on Schedule A. If you had enough other itemized deductions to itemize (rather than take the standard deduction), that $1,000 would reduce your taxable income. Any amount up to the 2% threshold ($2,000 in this example) was not deductible. So, you would effectively get a tax break on part of your advisory fees, assuming you itemized your deductions.

Two important caveats under the old rules:

1. You had to itemize deductions to benefit. If you took the standard deduction (which many taxpayers do), you couldn’t deduct investment fees at all. Only those who itemized on Schedule A could include these fees.
2. Alternative Minimum Tax (AMT) impact: Even before recent law changes, miscellaneous itemized deductions were disallowed under the AMT calculation. High-income taxpayers often fell under the AMT, which meant even if they deducted investment fees on the regular tax form, the benefit vanished on the AMT form. Essentially, those taxpayers ended up not getting the deduction due to AMT rules.

Despite those limits, many investors with significant portfolios did deduct their investment management fees in the past. If their fees were large enough to clear the 2% AGI hurdle (which is often the case with big portfolios paying ~1% in fees) and they weren’t heavily hit by AMT, they enjoyed a tax deduction for these costs. The principle behind it was simple: just as businesses can deduct costs to earn income (under IRC Section 162 for trade or business expenses), individuals were allowed a similar deduction for investment income-producing costs via Section 212.

The Game-Changer: Tax Cuts and Jobs Act (TCJA) Eliminating Investment Fee Deductions

At the end of 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law, ushering in the most significant tax overhaul in decades. One major change affecting individual taxpayers was the treatment of miscellaneous itemized deductions. **TCJA **suspended all miscellaneous itemized deductions that were subject to the 2% AGI floor for tax years 2018 through 2025. In plain terms, this means from 2018 onward, you can no longer deduct investment fees (and many similar expenses) on your federal income tax return. 💸 Ouch for investors — those advisor fees and brokerage costs suddenly became purely out-of-pocket, with no federal tax relief.

Key points about this change:

• What’s suspended? The entire category of miscellaneous itemized deductions (subject to the 2% rule) vanished for 2018-2025. This includes financial advisor and investment management fees, custodial fees, subscription costs for investment advice, safe deposit box fees, and unreimbursed expenses you paid to produce investment income. In short, all those Section 212 investment expenses are no longer deductible for individuals during this period. Other miscellaneous deductions like unreimbursed employee business expenses and tax prep fees were also eliminated in this window.
• Why the change? Congress simplified the tax code in some ways: the standard deduction was roughly doubled under TCJA, and in exchange, many itemized deductions were cut back or eliminated. Lawmakers aimed to simplify filing and saw these miscellaneous deductions as a target for removal. The idea was that a higher standard deduction would compensate many taxpayers for losing these smaller deductions. Indeed, far fewer people itemize their deductions after 2018 (millions who used Schedule A before now just take the standard deduction).
• Temporary suspension: It’s important to note the TCJA’s changes aren’t permanent. The law included a sunset provision: after 2025, many individual tax provisions revert to pre-2018 law (unless new legislation extends the changes). So, starting in 2026, investment fees might become deductible again as miscellaneous itemized deductions, if Congress doesn’t act to change the law further. There’s uncertainty here: the deductions could be reinstated, modified, or the suspension could be extended. Tax planning is tricky with that horizon, but it’s something to watch. For now, assume no deduction through tax year 2025.
• State tax alert: The TCJA was a federal law. States are free to adopt or reject those changes for state income taxes. As we’ll detail later, some states did not conform to the TCJA’s elimination of these deductions. So you might still deduct investment fees on your state tax return even though you can’t on the federal return. This varies by state (more on that in the State Nuances section).

In summary, the TCJA killed the federal tax deduction for investment fees for 2018-2025. If you’re an individual investor, this was a big negative change. Those fees now come entirely out of your after-tax income. Next, we’ll explore exactly what this means for individuals and then look at the situation for businesses.

Individual Investors: Can You Deduct Investment Fees on Form 1040 Now?

For most individual taxpayers, the answer today is NO – you generally cannot deduct investment fees on your federal Form 1040. Let’s break down what this means and a few special scenarios:

• No Miscellaneous Itemized Deduction: As explained, from 2018 through 2025, the IRS disallows any write-off for typical investment expenses (financial advisor charges, broker fees, etc.) on Schedule A. When you fill out your Form 1040 and Schedule A, there is no line to claim these expenses anymore. The IRS Schedule A instructions explicitly list investment expenses as not deductible under current law. Even though Section 212 is still part of the tax code (it wasn’t repealed), its effect is essentially turned off by another section (Section 67(g) added by TCJA) during this period. So, individual investors pay those fees with after-tax dollars now.
• Effect on different types of fees:
  • Financial advisor and management fees: Non-deductible. Whether it’s a percentage-of-assets fee or hourly planning fee related to your investments, you cannot deduct it on your individual return in 2023 (or any year through 2025).
  • Brokerage commissions: These were never a straight deduction, even before TCJA. Instead, commissions on buying or selling investments adjust your cost basis or your sales proceeds. For example, if you pay a $50 commission to buy stock, you add that $50 to the stock’s basis (reducing taxable gain when you sell). If you pay a commission to sell, it reduces the net proceeds of the sale. This treatment hasn’t changed. So while you can’t “deduct” trading commissions as an expense on Schedule A, you still get a tax benefit through basis adjustment. Important: Remember to factor those costs into your capital gain calculations so you don’t overpay tax on a sale.
  • Custodial fees for IRAs and retirement accounts: If you have an IRA that charges a $100 annual custodial fee, how you pay it matters for taxes. Paying from personal funds – prior to 2018 you could deduct that as a misc. deduction if it cleared 2% AGI, but now it’s not deductible at all. Paying the IRA fee out of the IRA’s assets is allowed and is actually a better move now (more on this strategy later). If the IRA pays its own fee, it’s effectively using pre-tax dollars (since IRA funds aren’t taxed yet) to cover the cost. The IRS does not treat that as a withdrawal or taxable distribution. It’s simply an expense paid within the account. So, while you get no deduction paying cash out-of-pocket, having the IRA custodian deduct the $100 from your IRA balance achieves a similar result: you avoid being taxed on that $100 (because it never comes to you as a distribution). We’ll revisit this as a strategy, but bottom line: no direct deduction for IRA fees on your 1040.
  • Mutual fund expense ratios: You can’t deduct these fees separately on your tax return, but you also generally aren’t taxed on the portion of fund earnings that went to fees. For instance, if a mutual fund earned $1,000 in dividends for you but took $100 of that to pay its management fee, the fund might only report $900 of income to you. In effect, the fee is subtracted before you ever see the income, so it’s like paying it with pre-tax dollars (this happens behind the scenes in the fund). As an individual, you simply report the net income or gains distributed to you. You won’t list the fund’s management fee anywhere on your tax forms. (It’s built into the lower taxable income you got from the fund.)
  • Investment publications, safe deposit boxes, tax advice related to investing: These fall under the same suspended deduction category. Buying an investment newsletter or paying for a safe deposit box to hold stock certificates used to be deductible misc. expenses (subject to 2% AGI). Not anymore under current law.

• What about “investment interest”? It’s easy to confuse investment interest expense with investment fees. Investment interest (like margin interest on money you borrow to buy investments) is still deductible for individuals, subject to certain limits (you can deduct investment interest expense up to the amount of your net investment income each year, and carry forward any excess). The TCJA did not eliminate the investment interest deduction. It specifically targeted miscellaneous fees and expenses, not interest. So, if you pay interest on a loan or margin account used for investing, you may deduct that on Schedule A (it’s a separate line item, not part of miscellaneous 2% category). This distinction is important: paying interest to a broker is treated differently (and more favorably under current law) than paying advisory or management fees.

• The special case of “trader” status: Most individuals are considered investors in the eyes of the IRS, not running a business. However, if you qualify as a trader in securities (a person who is full-time or nearly full-time in trading activity, meeting certain criteria of frequency and intent to profit from short-term market swings), you might be able to treat your trading as a business. Traders (who make a mark-to-market election or otherwise meet trader status) can deduct trading-related expenses on Schedule C as a business expense. This could include things like home office costs, computer software, and maybe subscriptions or data feeds for trading.
  • However, even a trader cannot deduct investment advisory fees for managing personal investments that are separate from the trading business. Trader status typically applies when you’re actively buying and selling for your own account as a livelihood. If you simply have a long-term portfolio managed by an advisor, that doesn’t make you a “trader business.” So for the vast majority of individual investors, Schedule C is off-limits for investment fees – those fees are personal, not a trade/business expense. (In tax terms, Section 162 business expense treatment doesn’t apply to personal investing, as affirmed by court cases like Higgins v. Commissioner, which ruled that managing one’s own investments is not a trade or business.)

• Trusts and estates (fiduciary accounts): If you’re asking from the perspective of a trust or estate (which file Form 1041, not 1040), the rules also changed under TCJA. Trusts and estates too lost the ability to deduct miscellaneous investment fees, except for certain fiduciary expenses unique to their administration. For example, trustee fees or executor fees – costs that wouldn’t be incurred if the property weren’t held in a trust – can still be deducted on the fiduciary income tax return. But a garden-variety investment advisor fee paid by a trust is considered the same type of expense an individual would incur, so it was also suspended by TCJA. (Regulations under Section 67(e) now clarify that purely investment-related costs don’t get a free pass just because a trust pays them.) In short, a trust can deduct fiduciary administration costs, but not general investment advisory fees during this TCJA period.

Bottom line for individuals: Unless you fall into a very narrow exception, you cannot write off your investment fees on your federal tax return right now. Every penny you pay to your financial advisor, broker, or custodian comes out of your own pocket with no federal tax break. This raises the stakes for paying reasonable fees and using any available strategies to at least pay them in a tax-efficient way (we’ll discuss such strategies shortly).

Business Entities: Deducting Investment Fees as a Business Expense

What about businesses or investors who operate through entities? The tax treatment of investment fees can differ for business entities and pass-throughs compared to individuals:

• Ordinary and Necessary Business Expenses: A corporation, partnership, or sole proprietorship engaged in a trade or business can deduct ordinary and necessary expenses of carrying on that business (under IRC Section 162). If an investment fee is incurred as part of a business’s operations, it may be deductible to the business. For example, suppose a corporation has significant investment income as part of its business model (maybe it’s an insurance company investing premiums, or any company investing its excess cash). If that corporation pays fees to a portfolio manager or advisor to manage its investments, the fee could be seen as an ordinary business expense in managing the company’s financial assets. Unlike an individual, the corporation isn’t subject to a 2% floor or misc. itemized rules – those were individual tax concepts. The corporation deducts the expense in full against its income, reducing taxable profit.
  • Similarly, if a sole proprietor (filing Schedule C) incurs an investment-related expense in the course of their business, it can be deducted on Schedule C. However, here’s a critical distinction: The expense must be directly connected to the business. For example, a self-employed consultant cannot deduct the fees she pays for her personal stock portfolio on Schedule C – that’s a personal investment, not a business expense. On the other hand, if that consultant maintains a separate investment account for her business (say, investing retained earnings or a cash reserve for the business) and pays some management fee on it, that might be considered a business expense.

• Investment Partnerships and Pass-Through Entities: Many investments are held via pass-through entities like partnerships or LLCs (which issue K-1s to owners). How are fees handled there? It depends on whether the partnership’s activities rise to the level of a trade or business or are merely investment activities:
  • If the partnership is essentially an investment fund (say a partnership that just holds stocks, bonds, etc. for the partners), historically the expenses for managing those investments would be Section 212 expenses. The partnership might report those expenses on the K-1 (often labeled as “investment expenses” or “expenses portfolio” etc.). Prior to 2018, an individual partner could potentially deduct them on Schedule A (again subject to the 2% rule). Post-TCJA, an individual partner gets no deduction – those expenses are effectively lost (they reduce cash distributions but provide no tax break to the partner). Some funds have tried to structure around this (for instance, by taking those fees at the fund level so net income reported is lower, or by structuring as a trade or business).
  • If a partnership or LLC actively operates a business (e.g. a real estate development LLC, or an LLC that is a trading business), then investment-related costs tied to that business can be deducted at the entity level. The net income flowing to owners on the K-1 is already after those expenses. In other words, the expense didn’t need to be separately stated as a misc. deduction – it was just a business expense reducing ordinary business income. For example, a partnership that manages money for clients (like a hedge fund’s management company) would deduct its expenses on its own business tax return; those expenses wouldn’t be limited by 2% rules because they’re business expenses. The key is that the entity must truly be engaged in a trade or business and the expenses must be part of earning that business income.

• S-Corporations and LLCs: An S-corp or LLC that is simply holding an owner’s personal investments is generally not considered to be in a trade or business. Creating an S-corp just to hold your stock portfolio doesn’t magically turn your investment fees into business write-offs. Tax law (again referencing Higgins v. Comm. and related cases) is clear that managing one’s own wealth is not a business. There have been creative strategies by wealthy families to get around this, such as setting up a family office as a separate company that manages the investments of the family and charges fees for those services.
  • In one notable case (Lender Management, LLC v. Commissioner, a Tax Court case), a family office LLC was found to be engaged in a trade or business of providing investment management services (because it had a profit motive, separate clients within the family, and was operated in a business-like manner). That allowed the LLC to deduct its expenses fully as business expenses. This is a complex planning area and not applicable to most people, but it shows that if you can legitimately structure investment activities as a business service, the expenses become deductible. Still, for a typical investor or small business owner, such structuring is usually not feasible or worthwhile purely for tax purposes.

• Expenses on Business Tax Returns vs Personal: As a simple rule, business tax returns deduct business expenses, personal returns deduct personal itemized deductions. Investment fees straddle that line. If the investments are part of a business’s financial operations (like a company treasury function or an integral part of generating business income), then those fees can usually be expensed by the business. If the investments are personal or just passive, they fall on the personal side – and, as we’ve seen, personal side investment expenses are suspended until 2026. Pass-through entities (partnerships, S-corps) essentially pass items to the owner’s personal tax return.
• If those items are categorized as Section 212 investment expenses, they will be non-deductible on the owner’s Form 1040 currently. Some pass-through entities may instead pay fees directly out of investment income (reducing what gets passed through as income). For example, a private investment partnership might pay the management fee out of the partnership’s assets, so each partner just gets a smaller allocation of income; in that case, there’s no deduction needed on Schedule A because the fee was effectively subtracted before income was distributed (similar to how mutual funds handle it). But if the partnership separately states the fee, the individual can’t deduct it under current law.

• Schedule C for Investment Advisors vs Investors: To avoid confusion, note that if you are a financial advisor or investment manager yourself, your business expenses are deductible (you’re running a business, after all). For example, a freelance financial planner would use Schedule C to deduct expenses like office rent, marketing, etc. But that’s the advisor’s own business, not the client investor. Here we’re focused on the person paying investment fees, not receiving them. So an investor paying an advisor doesn’t get a deduction, whereas the advisor receiving that fee does include it in income and can deduct their business costs of servicing the client. It might feel like a double standard, but it’s how the tax law draws a line between personal investment expenses and business operations.

Bottom line for businesses: A genuine business entity can deduct investment-related fees if those are ordinary expenses of the business. But simply incurring an expense through a business you own doesn’t automatically make it deductible if it’s really for your personal investing. If you are investing through a partnership or LLC, consult how they’re handling those expenses – some may effectively give you the benefit by netting them out of income, while others might leave you with nondeductible expense disclosures. And if you’re a business owner with idle cash to invest, any management fees on those funds are likely deductible on the business side (since it’s part of managing company assets). Always keep documentation to show the connection to business activity.

Tax-Smart Strategies for Managing Investment Fees (When Deductions Are Limited)

So, you’re an individual and find out you can’t deduct your investment fees. Are you completely out of luck? Not entirely. While you can’t deduct these expenses outright, there are strategies to minimize the after-tax cost of investment fees:

• Use Tax-Advantaged Accounts to Pay Fees: If you have a traditional IRA or 401(k) that is being managed for a fee, consider paying the advisory or custodial fees directly from that account rather than writing a check from your personal bank account. Why? Because when the retirement account pays its own fees, it’s effectively using pre-tax money. For example, imagine your advisor charges 1% and your traditional IRA is worth $100,000. The $1,000 fee for the year can be taken out of the IRA’s assets. That $1,000 was pre-tax money (you haven’t paid tax on IRA funds yet), so in essence you satisfied the fee with pre-tax dollars. If instead you paid the $1,000 from your personal checking account, that’s $1,000 of after-tax money gone (and no deduction to show for it). Prior to 2018, some people preferred to pay fees out-of-pocket to allow the IRA to keep growing and then deduct the fee – but with deductions suspended, the calculus flipped.
  • Now it’s often advantageous to have fees paid from within IRAs or other tax-deferred accounts. (Note: This applies to traditional pre-tax accounts. For Roth IRAs, paying fees from the Roth isn’t generally advised because Roth money is after-tax but grows tax-free; you’d rather keep as much in the Roth growing. And the fee can’t be deducted outside either, so it’s a bit of a wash – many choose to pay Roth fees from outside to preserve Roth assets.)

• Leverage Investment Vehicles that Embed Fees: As mentioned earlier, mutual funds and ETFs deduct their management fees from fund assets. The result is you as an investor only get taxed on the net income after those fees. In effect, the fee didn’t come out of your already-taxed pocket; it came out of pre-tax investment returns. If you invest in a professionally managed portfolio of individual stocks/bonds with an external advisor, you pay the fee separately and it’s not tax-deductible – meaning you pay tax on the full income and also pay the fee with no offset. By contrast, a mutual fund does the fee subtraction for you.
  • This isn’t to say you should switch all your investments to funds solely for tax reasons, but it’s a factor to consider. Some high-net-worth investors have even created private funds or used wrap accounts that mimic this effect. Fun fact: even commission-based loads or fees on funds get handled in a pre-tax way. For instance, if you buy a mutual fund share class that has a built-in yearly 1% commission to the broker (often through the expense ratio), that 1% reduces the fund’s distributions (so you don’t pay tax on that portion of income). Ironically, after TCJA, commission-based compensation structures for advisors became more tax-efficient for clients than paying an advisor a fee directly, because commissions can be wrapped into the fund expenses (pre-tax) whereas direct fees are paid with taxable dollars. Of course, tax efficiency is just one consideration – fiduciary standards and overall performance matter too. Many advisors who act as fiduciaries prefer fee-only compensation for transparency and to avoid conflicts of interest, even if the tax treatment isn’t as favorable to the client.

• Consider “Bunching” or Timing Expenses (Post-2025): For now, no amount of bunching your investment fees will help on federal taxes – they’re simply non-deductible. But if the law reverts in 2026 and these deductions come back, there could be strategies to bunch expenses into one year. For instance, if you could pre-pay a couple years’ worth of advisory fees in one year to exceed the 2% threshold, you might get a deduction (this was a strategy pre-2018 for some). However, prepaying fees isn’t always possible or advisable. Keep an eye on what Congress does; if it looks like 2026 will restore misc. deductions, you might plan to maximize deductible fees in that year (subject to any new rules that come along).

• Maximize Other Deductions or Adjust Portfolio: Since you can’t deduct fees, focus on other tax optimizations. For example, harvest tax losses in your portfolio to offset gains, take advantage of the investment interest deduction if you use leverage, and use tax-efficient investments (like index funds or municipal bonds) to reduce taxable income. If you’re paying high fees, evaluate if the value added by the advisor or fund justifies the after-tax cost. Sometimes, paying a fee is well worth it for better returns or peace of mind – but it’s good to be conscious that it’s paid with after-tax money now.

• Business Owner Strategy: If you own a business and also have substantial personal investments, talk to a tax advisor about whether any part of your investment activity can be tied into your business. For example, maybe your business has a cash management account that is professionally managed. Ensure that expense is paid by the business, not you personally, so it remains deductible. Be cautious not to mix personal investments into your business in an improper way – that can raise red flags and won’t survive an IRS challenge if it’s not legitimate. But legitimate business investments (like a company retirement plan or a captive insurance investment portfolio) should have their fees paid by the business or plan, yielding a deduction or reduction of taxable business income.

• Family Office and Advanced Planning: High-net-worth families who pay seven-figure investment fees have more at stake and have explored family office structures to treat investment management as a business. For instance, setting up an LLC that employs staff and manages the family assets for a fee can, if done correctly, shift expenses into the business realm. The 2017 Lender case gave some precedent for this. This is a complex and costly undertaking and only worth considering at large wealth levels. It’s mentioned here for completeness: it shows that at a certain point, the tax law allows a creative separation where your “investment enterprise” is a business in itself. For most people, this isn’t practical, but if you’re in that league, consult a specialized advisor for options.

In short, while you can’t deduct investment fees outright as an individual now, you can manage how you pay them to minimize the tax drag. Using pre-tax money (via retirement accounts or fund structures) is the key. And always weigh the value of professional investment help against its cost. Sometimes a lower-fee approach (like index funds with tiny expense ratios) can make sense if the tax deduction for a higher fee isn’t available to soften the blow. Other times, a great advisor justifies their fee by adding more than that value to your portfolio or financial security – even without a tax write-off.

State Tax Nuances: Are Investment Fees Deductible on State Returns?

Taxes vary across states, and some states didn’t follow the federal lead on eliminating these deductions. This means depending on your state, you might still get a tax benefit for investment fees at the state level:

• Conforming vs. Non-Conforming States: Many states use the federal definition of taxable income (federal AGI or federal taxable income) as a starting point for state taxes. When TCJA hit, some states automatically adopted the new federal rules disallowing misc. deductions, but others did not conform. A handful of states explicitly allow the old miscellaneous itemized deductions in whole or in part.
• Examples of State Rules:
  • California: California did not conform to the TCJA suspension of miscellaneous itemized deductions. In California, you can still itemize things like investment advisor fees on your state return. California Schedule CA (the adjustment schedule) permits an itemized deduction for miscellaneous expenses above 2% of AGI, just like the pre-2018 federal rule. So California investors lost the federal deduction but kept the state deduction (albeit California’s income tax rates are high, so this can be a meaningful benefit).
  • New York: New York decoupled from some federal changes as well. New York allows a state itemized deduction for miscellaneous expenses, although with some limitations at higher incomes. For NY residents who itemize on the state return, investment fees may still be deductible subject to the 2% AGI rule.
  • Other States: States like Minnesota, Iowa, Arkansas, Hawaii, among others, also allowed some form of these deductions after 2018. Each state’s law is a bit different – some adopted TCJA changes retroactively in later years, some partially adopted. For example, Minnesota initially allowed miscellaneous deductions in 2018 when federal didn’t, but later tax law changes in the state aligned more with federal rules. Iowa explicitly continued to allow the deduction as of a couple years ago. Arkansas and Hawaii have been noted by tax practitioners as still permitting the 2% deductions.
  • On the flip side, many states that follow federal taxable income strictly (or that have no state income tax at all) provide no deduction. States like New Jersey and Pennsylvania, which have their own unique tax codes, generally didn’t allow those deductions even before (those states tax schedules are very different – e.g., PA doesn’t allow misc. deductions at all, and NJ taxes investment income differently).

• Implication: Check your state’s tax instructions or consult a state tax expert. It could be that even though your federal Schedule A can’t include investment fees, your state return has an opportunity to deduct them. This might require keeping track of the fees separately and filling out a state-specific form or worksheet. Don’t assume the federal disallowance automatically means no state benefit. Conversely, don’t assume you can deduct on the state just because you used to – verify current state law, as some states passed legislation to conform to federal TCJA changes in subsequent years.
• Planning for state taxes: If you live in a state that allows these deductions, you still want to gather your investment-related expense information. The 2% of AGI threshold likely still applies at the state level. It might make the difference in whether itemizing on your state return is worthwhile. For example, if your state standard deduction is low, itemizing including these fees could save you some state tax dollars.

In summary, state tax treatment of investment fees is a patchwork. A few states offer relief where the IRS does not. Always double-check the rules for your specific state in the relevant tax year. It can be an unexpected silver lining to recoup a bit of the cost of investment fees through state tax savings, even if Uncle Sam says no.

Common Mistakes to Avoid with Investment Fee Deductions

Given the twists in the rules, it’s easy to slip up. Here are some common mistakes investors and business owners should avoid regarding investment fees and taxes:

• Trying to Deduct Disallowed Fees: Every tax season, some individuals still attempt to write off financial advisor fees or brokerage costs on Schedule A, not realizing the law changed. This deduction was eliminated for now, and claiming it will do no good (tax software will ignore it, or worse, an aggressive claim could draw IRS scrutiny). Mistake to avoid: Don’t force an investment expense deduction on your Form 1040 for 2022, 2023, etc. – it’s not permitted. Stay updated in case laws change for future years, but as of now it’s off the table.

• Forgetting Basis Adjustment for Commissions: While you can’t deduct trading commissions as an expense, remember that they affect your capital gains. A surprisingly common mistake is not including the cost of commissions in your stock or crypto basis. This could lead you to over-report gains and overpay tax. Always adjust your purchase price by any commission or trade fee, and subtract selling fees from your proceeds.

• Paying IRA Fees Out-of-Pocket Unnecessarily: Some investors continue to pay their IRA or other retirement account maintenance fees from personal funds out of habit (maybe they set it up years ago when it was deductible). Now, paying those fees from your own pocket confers no tax advantage – and it depletes your taxable cash when the IRA could have paid. Avoid this mistake: Have your IRA or 401(k) plan assets cover their own fees, unless there’s a strategic reason not to. It’s simpler and you’re effectively using pre-tax dollars to do it.

• Misclassifying Personal Expenses as Business Expenses: If you own a business, be careful not to run personal investment costs through the business books. For example, do not try to have your company pay the management fees for your personal brokerage account and then deduct it as a business expense. That’s not a **“necessary” business expense by any means (unless your company is in the investment business or there’s a legitimate connection). Such a move could be disallowed in an audit and potentially trigger penalties. Keep personal investing separate from business finances to avoid crossing any lines.

• Overlooking State Tax Opportunities: As mentioned, a mistake is assuming “not deductible federally means not deductible at all.” In states where the deduction is still available, failing to claim your investment expenses on the state return is leaving money on the table. Conversely, don’t mistakenly claim it in a state that disallows it. Know your state’s stance and itemize accordingly.

• Not Accounting for Fees at All: Some investors might ignore fees when calculating returns or tax impact. Even if fees aren’t deductible, they still affect your net investment results. From a financial perspective, always account for what you pay in fees. Sometimes, investors focus on gross returns and forget that, say, a 1% annual fee will reduce a 7% return to 6%. While this isn’t a tax filing mistake, it’s a planning mistake – it could lead you to take on more risk thinking you’ll achieve a certain after-fee return. Make sure your expectations and plans consider fees as a reduction of returns (since you can’t offset them with a tax deduction currently).

Avoiding these pitfalls will help ensure you don’t pay any more tax (or lose any more money) than necessary. The theme is: be aware of the current rules, separate personal vs business correctly, and capture any tax benefits still available (like basis adjustments or state deductions).

Pros and Cons: Paying Investment Fees from Taxable vs. Tax-Deferred Accounts

One strategic decision investors face is how to pay investment fees – either out-of-pocket from a regular (taxable) account or directly from within a tax-deferred account like an IRA. Since deducting these fees isn’t an option for individuals currently, this choice can affect your after-tax wealth. Let’s compare the two approaches:

Approach	Pros	Cons
Pay Fees Out-of-Pocket (Taxable $$)	– Keeps more money invested in your tax-deferred account, potentially growing sheltered from tax. – May give you a sense of control, as you’re paying bills from cash flow.	– Uses after-tax dollars to pay the fee, with no deduction – effectively making the fee costlier. – You pay income tax on money, then use it to pay fees, which is inefficient under current law.
Pay Fees from Within an IRA/401(k)	– Fee is paid with pre-tax funds – no tax paid on that money, as it’s taken directly from the account. – Simplifies your expenses (no separate bill to pay). You don’t feel the fee in your checking account.	– Reduces the balance in your retirement account (less money compounding over time). – For Roth accounts, using Roth money to pay fees effectively wastes tax-free growth (better to pay Roth fees out-of-pocket if possible).

How to use this: Under today’s rules, paying fees from a traditional IRA or 401(k) is often beneficial because you save on taxes (the payment is never taxed). The trade-off is a slightly lower account balance growing for the future. For long-term growth, keeping money invested can be valuable, but if there’s no tax deduction for paying externally, many conclude it’s better to let the pre-tax account bear the cost.

For Roth IRAs (already-taxed money growing tax-free), it’s generally better to pay fees from outside funds if you can, to preserve the Roth’s tax-free growth (since paying from a Roth doesn’t save you any current tax, it just shrinks the Roth).

Everyone’s situation is different. If cash flow is tight, you might have no choice but to have accounts pay their own fees. The key is being intentional: since you can’t deduct fees, this pros/cons comparison helps you at least minimize the tax impact indirectly.

FAQ: Quick Answers to Common Questions on Investment Fees and Taxes

Q: Can I deduct my stock brokerage commissions or trading fees on my tax return?
No. You cannot deduct stock trading commissions as an expense. Instead, add purchase commissions to the cost basis of the stock and subtract selling commissions from sale proceeds to reduce capital gains.

Q: Are financial advisor fees tax-deductible for individual investors?
No. Under current federal law (2018–2025), individuals cannot deduct financial advisor or investment management fees on Form 1040. These fees are paid with after-tax dollars, without any write-off.

Q: Did the Tax Cuts and Jobs Act eliminate the deduction for investment fees?
Yes. The TCJA of 2017 suspended all miscellaneous itemized deductions – including investment-related fees – from 2018 through 2025. Individual taxpayers cannot deduct these expenses during this period.

Q: Can businesses still deduct investment management fees?
Yes. A business (C-corp, partnership, LLC, etc.) can deduct investment fees if they are ordinary and necessary business expenses. For example, a company’s portfolio management fees or a fund’s expenses are deductible at the entity level.

Q: Are IRA or 401(k) account fees tax-deductible?
No. If you pay an IRA or 401(k) fee out-of-pocket, there’s no deduction currently. But if the retirement account pays its own fee directly, it effectively uses pre-tax dollars, which is more tax-efficient.

Q: Can I deduct mutual fund expense ratios or management fees?
No. You don’t deduct mutual fund fees on your tax return. The fund’s expense ratio is taken out of the fund’s earnings. You’re only taxed on the net income/gains the fund distributes to you.

Q: Will investment fees become deductible again after 2025?
Maybe. If Congress allows the TCJA provisions to sunset, miscellaneous itemized deductions (including investment fees) would return in 2026. However, future tax law changes could extend the disallowance or alter the rules.

Q: Are investment fees deductible on state income tax returns?
It depends. Some states (like California, New York, and others) still allow miscellaneous itemized deductions, so investment fees can be deductible on the state return. Many states, however, follow the federal disallowance.

Q: Can a “trader in securities” deduct investment expenses on Schedule C?
Yes (if qualified). Individuals who qualify as traders (business status) can deduct trading-related expenses on Schedule C. But this is rare and doesn’t include typical long-term investment advisory fees for personal portfolios.