Setting up a financial plan can be tricky. Even if you are comfortable making your own money decisions, sometimes getting fresh insight from a pro can pay big dividends, figuratively and literally. Professional financial planners don't come cheap, but you may be able to write off their fees when you file your income taxes.
The Internal Revenue Service lets you deduct the fees you pay for investment counseling and advice, but there are limitations. You can only write off those charges if the investments throw taxable income your way. Things can get a bit sticky if your investment adviser puts you in tax-exempt municipal bonds, since the interest on those bonds isn't taxable income. Things get even more interesting if you later sell your municipal bonds for a profit, since the resulting capital gain is taxable income. In these situations, you'll have to determine the percentage of the adviser's fees that applies to the taxable income your investments kick out.
If your investment adviser works on a full-commission or part-commission basis, the fees you pay may not all qualify as an investment advisory charges. For example, if your adviser sells you $10,000 worth of a mutual fund with a 6 percent load, you'll pay $600 as a front-end sales charge. Your adviser gets part of that as a commission. Uncle Sam doesn't consider any of that $600 to be an investment advisory fee. You can't write off this expense. Instead, it becomes part of the cost basis of your mutual fund shares.
One deduction that's easy to overlook covers travel expenses for seeking investment advice. If your financial planner is in a different city, you can write off the cost of going in for a consultation. That includes all of the standard transportation and lodging costs such as your airline ticket, taxi fare, hotel bill and part of your meals.
Just don't go crazy with it. You can't take a family vacation and deduct the entire cost just because you stopped in to say "hi" to your financial planner. Traveling to attend an investments convention or seminar at a swank resort hotel doesn't qualify as a tax deduction. Neither does the cost of attending a stockholder's meeting, even if you own stock in the company.
Even if you pay a hefty fee for investment advice, you may not get to write off all of it. You'll have to itemize if you want to claim any deduction for your financial planning fees, and itemizing might not give you a lower tax obligation than taking the standard deduction. If itemizing turns out to be your best bet, you have to include your Investment advisory fees with your other miscellaneous expenses, which are limited by the IRS' "2 percent rule." You can only deduct the amount of your miscellaneous expenses that exceeds 2 percent of your adjusted gross income.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.