Are Financial Planning Fees Tax Deductible?
It’s tax season and every money-minded person is looking back at past receipts and expenses and asking themselves: Is this tax deductible?
When it comes to financial planning fees, the answer is a little complicated, due to tax codes. It is somewhere between a ‘yes’ and ‘no’. The truth is, this question’s answer changes depending on the circumstances.
In order to try and deduct financial planning fees from your taxes, you need to itemize the fees on Schedule A of IRS form 1040. To do this, you need to categorize the fees under Line 23 of the section titled Job Expenses and Certain Miscellaneous Deductions. This puts the fees into the same category as unreimbursed employee expenses.
This is the straightforward part. From that point on, it’s up to the numbers. With unreimbursed employee expenses, you only get the deduction if the total of all the expenses exceeds 2% of your adjusted gross income from line 38 of the 1040 form. If the summation of these expenses does not exceed 2%, no deduction is granted.
In the majority of these situations, the amount total of the expenses will not exceed that 2% number. In that instance, your financial planner in Dallas may advise that you change the account from which the fees are deducted. This route has its benefits but, again, due to the tax code, it has its own can of worms that could cause complications if not handled carefully.
Typically, the end goal of changing the account financial planning fees are drawn from is to take the fees from the same account the financial planning was used to manage. That is, if you have an IRA that you built or managed alongside a financial planner in 2016, you might shift the fees to that IRA. By doing this, the account holder gets to pay their financial planning fees with pretax dollars.
But, be wary. Never cross hairs between taxable accounts and accounts like IRAs. If your financial advisement was tied to a taxable account, you must draw the fees from the taxable account. If your fees were tied to an IRA, you should draw the fees from the IRA. Taking the fee expenses from the IRA when they are actually tied to a taxable account can lead to a major penalty on the entire IRA. This can lead to a huge tax penalty and a possible disqualification of the IRA all together.
It’s also important to not list your expenses deducted from an IRA account on your Schedule A. Trying to take an extra tax deduction on fees drawn from a pretax account could also give you an extra headache you don’t need.
With Safe Money CLA, the most reliable retirement planning company in Dallas, we can give you well-educated advisement on pretax account management and tax filing to keep your retirement funds safe from tax penalties. Call us and schedule an appointment with one of our financial experts to learn how you can properly record your pretax and taxable savings accounts and related fees when you file your taxes this season.