Don't Overlook These Investment and Tax-Related Deductions

April 9, 2007

If you’re getting ready to file your 2006 tax return, you’ll want to be sure you’re taking advantage of all the deductions to which you are entitled. According to the Connecticut Society of CPAs, two categories of deductible expenses that often get overlooked are investment and tax-related expenses.

These expenses fall into the category of miscellaneous itemized deductions, which are deducted on Schedule A of your tax return. Your investment and tax-related expenses – when added to your other miscellaneous itemized deductions – are deductible to the extent that, in sum, they exceed two percent of your adjusted gross income (AGI). Only the excess is deductible on Schedule A.

To qualify as a deductible investment expense, the expense must be ordinary and necessary and related to:

producing or collecting taxable income or
managing or maintaining property held for producing income.

Keep in mind that expenses related to tax-exempt investments are not deductible because they generate tax-free income. Here are some of the most common investment and tax-related deductible expenses.

Fees for Investment Management, Legal Advice, and Accounting

You may deduct the fees you pay to an investment manager, broker, bank, or trustee who manages your investments and collects your taxable bond interest and/or stock dividends. This category of deductible expenses does not include the commission you pay a broker to buy or sell your securities or bonds. These costs are added to the investment’s cost basis and reduce your taxable gain when the investment is sold.

In most cases, you may also deduct legal expenses that involve income producing property. If you pay someone to keep track of your taxable investments, those expenses are deductible as well.

Travel and Transportation Costs

Travel costs you incur to look after your investments or to visit your accountant, attorney, stockbroker, or trustee for investment-related business are also deductible. If you own investment property in a resort area, be sure to keep records that show the trip was taken primarily to check on your investment property and not a vacation.

Legal and Professional Fees

Amounts you incur for legal advice related to attempting to produce or collect taxable income qualify as a miscellaneous itemized deduction.

Investment Publications

Subscription fees to investment-related publications or websites, such as The Wall Street Journal or TheStreet.com, are deductible.

IRA and Keogh Custodial Fees

You may deduct these fees only if you pay them with a separate check. When the fees are withdrawn from your retirement account, they are not deductible.

Safe Deposit Box Rental

If you use a safe deposit box exclusively to store stocks, bonds, and documents that relate to generating taxable income, you can add the box’s cost to your other miscellaneous itemized deductions.

Tax Advice and Preparation Fees

Any fees you pay for tax return preparation or tax advice qualify as miscellaneous itemized expenses and are deductible in the year you pay them. This means that on your 2006 tax return, you can deduct the amount you paid in 2006 for preparing your 2005 return.

You may also deduct expenses for books, publications, or tax preparation software that you use in preparing your tax return. The costs associated with filing electronically are deductible as well. Taxpayers who are audited and pay someone to represent them may deduct the cost.

Fees paid to prepare tax schedules related to business income (Schedule C) or farm income (Schedule F) are deductible on those forms. By doing so, the expense is fully deductible and not subject to the two percent of AGI limitation.

Consult with a CPA

A CPA can help you maximize your deduction for investment- and tax-related expenses.

Questions? Contact Mark Zampino at 860-258-4800, ext. 212 or markz@cscpa.org.