Saving money on taxes is a priority for many investors. In this article, we discuss a tax deduction for financial advisor fees that you may have heard of, along with some other tax-efficient investment strategies.
While you may no longer be able to save money by deducting advisor fees, you can search for financial professionals who offer services within your budget by using Bankrate’s AdvisorMatch tool.
Are the costs of a financial advisor tax deductible?
No, they are not. At least not anymore.
The Tax Cuts and Jobs Act (TCJA) of 2017 ended the deductibility of financial advisor fees, as well as a number of other itemized deductions. From January 2018, these reimbursements will no longer contribute to reducing your tax bill.
Before the TCJA, investors could deduct financial advisor fees if they exceeded 2 percent of their adjusted gross income (AGI) in 2017 and previous tax years. But this actually only provided some relief for those incurring significant consultancy costs. To get it, you had to claim the expense as a miscellaneous itemized deduction on Schedule A of your tax return.
The TCJA eliminated a number of other tax benefits for investors, who can no longer deduct expenses related to:
- Accounting costs
- Fees paid to brokers or trustees for managing investment accounts
- Fees paid for legal advice and tax advice
- Subscription costs for investment publications
- Rental costs for a safe
However, the financial advisor tax deduction may not be gone forever. The changes implemented under the TCJA are expected to expire in 2025, potentially reopening the door to measures implemented before 2018. Until then, investors should look elsewhere for opportunities to reduce their tax bills.
3 other ways to save money on investment taxes
While the deduction for financial advisor fees is off the table for now, there are still opportunities for smart investors to save money on their taxes.
These strategies may not be formal tax deductions, but they can still help minimize your tax bite. Here’s what you need to know.
Losing capital gains
One way investors can reduce their tax liability is through capital gains losses. While no one likes to sell at a loss, doing so strategically in an investment account can help you with your taxes.
When you sell an investment for less than you paid for it, you incur what is called a capital loss. This loss can be used to offset capital gains, reducing the overall tax amount. For example, suppose you sold and realized $2,000 in gains from your investments, but also sold and realized $1,000 in losses. You’d end up with a taxable gain of just $1,000, and a smaller tax bill.
But what if you had a particularly brutal year with more losses than gains – or no gains at all? If your capital losses exceed your capital gains, you can claim up to $3,000 of the excess loss to reduce your ordinary income, according to the IRS.
If your excess losses total more than $3,000, you can roll over these losses to help offset capital gains in the future.
Tax-loss harvesting is a strategy in which investors strategically sell investments in a loss position and then reinvest the proceeds in similar but not identical assets. If you want to redeem the same investment, you must wait at least 30 days or risk running afoul of the IRS’s wash sale rule.
By practicing tax loss harvesting, investors may be able to reap the benefits of realized losses without significantly changing their overall investment strategy.
401(k) and traditional IRA contributions
Contributing to retirement accounts, such as a 401(k) or a traditional IRA, can provide significant tax benefits.
These contributions are tax deductible, meaning they reduce your taxable income for the year in which you make the contribution. For example, if you contribute $5,000 to a traditional IRA, you may be able to deduct that amount from your taxable income, resulting in a lower bill.
Additionally, earnings within these retirement accounts are deferred until you retire. This allows your investments to grow tax-free for years, while still receiving a tax benefit in the present.
The downside to traditional IRAs and 401(k)s is that you will ultimately be subject to income taxes when you withdraw money in retirement. If you prefer to skip a tax bill entirely, you might consider a Roth IRA, which allows tax-free withdrawals in retirement but won’t reduce your taxable income today.
Enjoy lower long-term capital gains
If you hold an investment in an investment account for more than a year before selling it, any gains from the sale may qualify for lower long-term capital gains rates. These tax rates are generally more favorable than short-term capital gains rates, which are based on your ordinary income tax brackets.
The long-term capital gains rates are 15 percent, 20 percent and 0 percent. In 2024, you can qualify for the 0 percent if your taxable income is up to $47,025 for single filers or $94,050 for married couples filing jointly. So if you sell long-term securities during a year when your income is particularly low, you can avoid paying capital gains taxes on investments.
However, this can be difficult, because if you realize too much ordinary income, you will not qualify for the 0 percent rate and you will pay investment tax at a higher rate.
In short
Although financial advisor fees are no longer tax deductible under current law, investors still have several strategies to optimize their tax situation. As tax laws change, it’s important to stay informed and consult a tax professional or financial advisor to ensure you get the most out of the available deductions.
