While financial advisor fees are no longer deductible, there are things you can do to keep your tax bill as low as possible. ITEMIZED DEDUCTIONS CAN STILL BE REQUESTED FOR FEES PAID FOR CERTAIN FINANCIAL SERVICES. In accordance with section 212 of the Internal Revenue Code, you are allowed to deduct expenses not related to a business as long as they are directly related to the production of revenue. Financial advisors who work as employees must report all unreimbursed work-related expenses on Form 2106 and attach them to Schedule A (those who cannot itemize deductions cannot do so).
Major expenses, such as new furniture, can be deducted in the year they were purchased under Section 179 of the Internal Revenue Code in the appropriate type of tax return. Instructions for Form 2106 (202). However, it should be noted that the cost of financial planning advice that does not specifically refer to one of the categories of allowable expenses in Section 212 is not deductible. Michael Kitces is director of planning strategy at Buckingham Strategic Wealth, a provider of turnkey wealth management services that supports thousands of independent financial advisors.
It should be noted that, in this context, it is still important that the client's IRA pays only the investment management fee (AUM) and not part of the financial planning fee (and, in addition, as always, the IRA should only pay its own investment management fee and not the AUM fees from any other account). In other words, if an AUM commission, including financial planning, were 2.5% in a world in which most managers charged less than 2%, the additional fee of 0.5% could raise doubts; but when the AUM fees for financial planning are directly in line with other fees that are limited to investment, the implication—at least from a fiscal standpoint— is that part of the attributable to services not related to investment cannot be that important. So what do you think? Do you combine financial planning services with your AUM fee? What is your guidance to customers regarding the deductibility of their fees? If you charge a withholding fee, do you detail the parts that would be deductible for customers?. Therefore, using IRA assets to pay for the IRA owner's personal financial planning expenses would, at best, be a distribution of that amount in dollars and, at worst, a prohibited transaction that would trigger the distribution of the entire account.
These provisions of the tax code allow tax deductibility for expenses such as tax preparation, advice on income and wealth tax planning (although, in particular, drafting estate planning documents is not deductible), ongoing investment management fees and investment advice payments. Which means that, technically, those customers should probably only deduct part of the AUM fee, not the full amount, at least when the AUM fee covers a “significant amount” of financial planning services. Today, taxpayers have much less ability to deduct expenses related to investment, asset management, and fiscal and financial planning. Fortunately, the issue may not be subject to scrutiny soon, as many advisory firms with bundled fees continue to charge the same as companies that are dedicated solely to investment (meaning that financial planning fees may not be important from a tax point of view).
However, financial planning fees that are not specifically attributable to investment management (or tax planning) are not deductible, but are considered personal expenses. If you're not covered by a retirement plan at work, file a single or head-of-household return, or are married and your spouse isn't covered by a retirement plan at work, you can deduct all of your traditional IRA contribution regardless of your income. However, with the rise of wealth management, it is increasingly common for consumers to pay a single “combined” AUM fee, which covers not only investment management services (deductible), but also financial planning (non-deductible). Ultimately, the easiest solution to the problem, at least from a fiscal perspective, is to simply unlink financial planning and investment management fees.
For advisors who have already disaggregated their fees, charging a separate or ongoing advance payment (or both) for financial planning services and an AUM (lower) fee for “investment management only”, tax rules are fairly simple to apply. I write about financial planning strategies and practice management ideas, and I have created several companies to help people implement them. . .
