Under the new tax reform law, investment expenses are no longer deductible as a miscellaneous itemized deduction. For example, if you have an investment account and are paying fees to have it managed, those fees are no longer deductible. This also means IRA and other types of retirement account fees that are considered investment fees are no longer deductible.
This affects more than just the itemized deduction for investment expenses, as these fees are used in the computation of net investment income (NII). NII is investment income reduced by investment expenses. NII is used in other tax computations as well. Here are two examples, one that is taxpayer beneficial and one that is not:
Investment Interest Deduction: Taxpayers who itemize their deductions can take a deduction for interest paid on debts to acquire investments. However, that deduction is limited to the lesser of the interest expense or NII. The elimination of investment expenses in the determination of NII effectively makes NII larger, and in turn, allows for a larger investment interest deduction.
Surtax on Net Investment: The Affordable Care Act imposes a 3.8% surtax on NII for higher-income taxpayers. This surtax generally applies to taxpayers filing a joint return with an AGI in excess of $250,000, married filing separate taxpayers with an AGI in excess of $125,000 and other filers with an AGI in excess of $200,000.
Since the tax is based on the NII, not being able to deduct investment expenses in the computation of NII effectively makes the NII larger, and thus the amount subject to the surtax is larger.
In the past, many taxpayers, in an effort to help their IRA or other retirement plans grow, would pay the fees for those accounts out of separate funds and then deduct those fees as investment expenses. Now that investment expenses are no longer deductible, it may be appropriate to reconsider that approach.
If you have questions about how the loss of the deduction for investment expenses might impact your taxes, contact the experts at Henssler Financial:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Disclosures: This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
