Tax Deductions for Expenses to Manage Investments
Just as investments produce income that is usually taxable, expenses that you incur from producing this income may be deductible to offset the taxes from this income. Careful record-keeping is a must so that you can substantiate your deductions in case of an Internal Revenue Service audit. You deduct most investment expenses as miscellaneous itemized deductions, but some must be added to the cost basis of the investment, affecting your eventual capital-gains taxes.
Any interest you pay on money borrowed to purchase an investment to produce taxable income outside of a business operation is deductible as investment interest. If you use the cash method of accounting, you can deduct investment interest when you pay it. Under the accrual method, you can deduct investment interest when you accrue the interest. If you borrow money and use part of the proceeds for investments and part for personal use, you must allocate the interest according to how you have used the money. If you used 20 percent of the loan proceeds for personal use, only 80 percent of the interest on the loan is deductible.
You may deduct many fees incurred with the production of investment income. Attorney's fees or accountant's fees that you pay for advice or counsel when making investments are deductible as a miscellaneous itemized deduction. In addition, office expenses or clerical expenses that you pay are also deductible. Safe deposit box rental that you pay to store investment securities or other investment-related items securely is also a deductible expense.
How to Deduct
You claim most of your deductible investment expenses as miscellaneous itemized deductions on Schedule A of your federal income tax forms. Miscellaneous itemized deductions are subject to a 2 percent limitation, meaning that the total of all of your miscellaneous itemized deductions, including investment expenses, are only deductible to the extent that they exceed 2 percent of your adjusted gross income. If your AGI is $100,000, only your total miscellaneous itemized deductions that exceed $2,000 are deductible.
Many travel expenses related to investments are not deductible. This includes expenses to attend a stockholder's meeting for a company that you own stock in if that is the extent of your interest in the company, even if you are gathering information to make an investment decision. The same is true for attending an investment seminar for educational purposes. Expenses incurred to produce tax-exempt income also isn't deductible.
Fees that you pay a broker to purchase an investment, such as commissions, are not deducted as a miscellaneous itemized deductions. These fees must instead be added to the cost basis of the investment. You essentially receive a deduction for these fees when you sell the investments, as you subtract the cost basis from the sale amount to arrive at the amount of taxable gain.
Craig Woodman began writing professionally in 2007. Woodman's articles have been published in "Professional Distributor" magazine and in various online publications. He has written extensively on automotive issues, business, personal finance and recreational vehicles. Woodman is pursuing a Bachelor of Science in finance through online education.