Investing your money with a broker isn't free. Depending on the type of investment and the firms you deal with, you may have to pay commissions, brokerage fees or mutual fund costs. It would be lovely if you could just deduct all that expense from your investment income, but the tax code doesn't work that way.
If you pay a broker, a bank or some other agent to collect the interest or dividends on your investments, you can claim what you pay as a tax deduction. If you pay a broker -- or whoever -- to buy and sell stocks and bonds, you don't get a deduction. If you invest through a public mutual fund, you get a 1099-DIV at the end of the year showing your net income from the fund. That figure already includes any deductible expenses, so you don't get to subtract anything yourself.
When you sell stock, you pay capital gains tax on the difference between the adjusted purchase price and adjusted sale price. That's where you have a chance to reclaim the fees you spent buying and selling them. If you buy a block of stock for $5,000 and pay $500 in fees, then sell it for $10,000, you factor in the fees when figuring capital gains: Your taxable income from the sale is only $4,500 ($10,000 minus $5,500). The fees for selling the stock will cut your gain further.
If you are in a dividend reinvestment plan, the company automatically buys shares of stock with your dividends. You can write off any service charges you pay for the plan. You can also deduct fees for investment counseling, and possibly accounting and legal services related to your investment income. If you rent a safety deposit box for storing shares, bonds or other documents, the fee for the box is deductible. If any of your investments are in tax-exempt securities, you can't take off any fees for those expenses.
Investment expenses are a miscellaneous deduction. To claim them, you have to itemize on Schedule A, instead of taking the standard deduction. You add them in with all your other miscellaneous expenses and subtract 2 percent of your adjusted gross income, which you figure on the front of your 1040: Whatever is left is your deduction. Other "2 percent expenses" include dues for professional groups, job search costs, work clothes, work tools and union dues.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.