Until Congress passed the Tax Cuts and Jobs Act last December, investors were able to deduct the fees associated with the professional management of their investments.
These fees were deductible to the extent that the taxpayer’s total miscellaneous itemized deductions exceeded 2% of their adjusted gross income.
For example, assume your that adjusted gross income was $100,000, that your investment management fees were $10,000, and that you had no other itemized deductions. You would have been able to deduct $8,000 of those management fees (Two percent of $100,000 is $2,000, or the floor. The allowable deduction would be $10,000 of fees incurred, less the $2,000 floor, or $8,000).
The new tax bill eliminated this deduction, and all miscellaneous deductions. So, for example, you will also no longer be able to deduct tax return preparation fees.
However, many taxpayers were not able to take these deductions. Some did not have enough miscellaneous deductions to exceed the 2% floor. Others were subject to the alternative minimum tax and, therefore, were not eligible to deduct itemized deductions. In addition, fees to manage an IRA were not deductible, because the fees were not incurred to generate taxable income.
The good news is that Congress significantly increased the standard deduction. The deduction for taxpayers filing as “single” is $12,000 and for those filling as “married filing jointly” it is $24,000. This is a significant increase from the previous amounts of $6,500 and $13,000, respectively, under prior law. Some tax experts are now predicting that as many as 95% of taxpayers will claim the standard deduction.
So, losing the ability to deduct professional fees will not affect the vast majority of taxpayers.
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