A Tax Deduction Checklist for Investment Expenses

Every serious investor knows that it costs money to make money. Fortunately, tax law allows you to deduct certain expenses that are associated with investments that produce taxable income. You generally can deduct investment expenses as miscellaneous itemized deductions, to the extent that your total miscellaneous itemized deductions exceed 2 percent of your adjusted gross income (AGI). To qualify as an investment expense, the expenses you pay must be related to (1) producing or collecting income or (2) managing, conserving, or maintaining property held for producing income. Expenses attributable to rental property are deductible from gross income and not subject to the 2 percent floor.

Here are some of the more common investment expenses that may be deductible on Schedule A, subject to the 2 percent limit.

Accounting Fees

If you pay someone to keep track of your taxable investments, you may write off the fees you pay that individual.

Trustee’s Administrative Fees

Individual Retirement Account (IRA) trustee fees that you pay to maintain your IRA are a deductible investment expense, but only if you pay them by separate check. Fees that are automatically deducted from your account are not deductible.

Travel and Transportation Costs

You may claim a deduction for travel costs you incur to look after investments, or to seek professional advice from an accountant, attorney, stockbroker or trustee, so long as you do not invest solely in tax-exempt investment vehicles. (If you own investment property in a resort area, keep detailed records to show that the trip was necessary for checking your investment property and was not a vacation.) Bear in mind that you may not deduct travel expenses associated with a trip to attend an investment or financial planning seminar, convention or meeting, nor may you deduct the cost of the seminar or convention itself.

Legal Costs

Legal expenses related to investment activities are usually deductible as long as the lawyer’s advice is related to the determination of your tax liability, tax planning, or keeping track of taxable investments.

Safe Deposit Box Rental Fee

You may deduct the cost of renting a safe deposit box, if you use the box to store stocks, bonds, or investment-related documents that generate taxable income.

Subscriptions to Investment Publications and Services

You may claim a deduction for subscriptions to investment-related publications or services. You may not, however, write off in one year the cost of a multiple-year subscription. Subscriptions must be deducted one year at a time.

Investment Management or Investment Planner’s Fees

If you pay someone to manage your investments, you may deduct any amounts you pay for his or her services. You may also deduct custodial or service fees charged by a dividend reinvestment plan.

Telephone and Postage Expenses

The cost of investment-related telephone charges, including the cost of cellular and long- distance calls are deductible miscellaneous expenses. You also may write off the cost of postage and supplies associated with your taxable investments.

Keep in mind that a taxpayer may not deduct the cost of an office at home unless his or her investing activities constitute a business. A dealer or trader in securities is considered to be in business, while an investor who uses a home office primarily for reading financial periodicals and reports, clipping bond coupons, and making investment decisions would not qualify for the home office deduction because these activities are not the taxpayer’s trade or business.

To calculate your deduction for miscellaneous itemized expenses, add the total of your investment expenses to your other miscellaneous deductions such as unreimbursed business expenses and tax preparation and tax counsel fees. Then subtract 2 percent of your adjusted gross income from the total amount of these expenses.

Some upper-income itemizers may be subject to an additional overall limitation on the deductibility of certain itemized deductions including miscellaneous itemized expenses, taxes, home mortgage interest, and charitable contributions. According to tax law, the total of this group of deductions must be reduced by 3 percent of the amount by which your 1998 adjusted gross income exceeds $124,500 ($62,250 if married, filing separately). You should note that investment interest expenses, gambling losses, non-business casualty and theft losses, and medical and dental expenses are not subject to the overall limit on itemized deductions.