When Are Investment Expenses Tax Deductible?

Did you know you can write off some of your investments, giving you a double benefit financially? The IRS allows tax deductions for investment-related expenses if those expenses are related to producing taxable investment income. Since maximizing your tax deductions has the potential to reduce your tax burden, we are going to discuss some of the most common deductible investment expenses and how they can reduce your taxable income.

Prior to the Tax Cuts and Jobs Act (TCJA) in 2017, taxpayers were allowed a tax deduction for certain expenses known as “miscellaneous itemized deductions.” These included expenses such as fees for investment advice, IRA custodial fees, and accounting costs necessary to produce or collect taxable income. For tax years 2018 to 2025, these deductions have been eliminated.  

Many investors prior to the TCJA, were still unable to fully recognize these deductions due to: 

● The 2% adjusted gross income test where miscellaneous itemized deductions had to be greater than 2% of your AGI before you could receive any benefit.

●The alternative minimum tax (AMT) could kick in if your income and deductions were too large, resulting in a loss of all or a portion of your itemized deductions.

Tax savings are still out there, if you itemize your deductions. Investment interest expense is the interest paid on money borrowed to purchase taxable investments. This includes margin loans for buying stock in your brokerage account. In these cases, you may be able to deduct the interest on the margin loan.

The amount that you can deduct is capped at your net taxable investment income for the year. Any leftover interest expense gets carried forward to the next year and potentially can be used to reduce taxes in the future. 

To calculate your deductible investment interest expense, you need to know the following:

● Your total investment income for investments taxed at your ordinary income rate 

● Your total investment interest expenses (for loans used to purchase taxable investments)

Net investment income includes ordinary dividends and interest income, but does not include investment income taxed at the lower capital gains tax rates, like qualified dividends, or municipal bond interest, which is not taxed.  

If you have further questions, call us today!