Prior to 2018, fees accrued from working with a financial advisor could be deducted as a miscellaneous investment-related expense.

However, the Tax Cuts and Jobs Act introduced some significant changes to what you can and can’t deduct as an investor. Before the legislation took effect, investors were allowed to reduce their taxable income by claiming a deduction for miscellaneous itemized deductions.

That included deductions for investment-related expenses, such as:

• Financial advisor fees
• Custodial fees paid to IRA accounts
• Accounting costs
• Fees for legal and tax advice
• Trustee fees

To qualify for this tax break, taxpayers had to show miscellaneous itemized deductions greater than 2% of their adjusted gross income (AGI) for the year.

For example, if your hypothetical AGI was $200,000 in 2017, you could have potentially deducted financial advisor fees and other investment-related expenses in excess of $4,000, or 2% of AGI. If you paid $6,000 in fees to your advisor, $2,000 could have been eligible for the deduction.

The Tax Cuts and Jobs Act eliminated these deductions beginning with the 2018 tax year. This change to the tax code, along with others established by the act, are set to remain in effect through 2025.

It’s possible that the miscellaneous itemized expense deduction could be reinstated past 2025 if additional changes are made to the Internal Revenue Code.

While you can no longer deduct financial advisor fees, there are some other strategies that may potentially lower your tax bill. 

First, if you’re investing in a 401(k) or similar workplace plan, those contributions are automatically deducted from your taxable income. This is a type of above-the-line deduction, meaning you can deduct those amounts regardless of whether you itemize or not. Contributions to a health savings account (HSA) would also be considered an above-the-line deduction.

Next, you may be able to deduct contributions made to a traditional IRA. Whether you can deduct those contributions and the amount you can deduct may depend on your income, filing status and whether you’re covered by a retirement plan at work.

Investment interest expenses also remain tax deductible under the Tax Cuts and Jobs Act. If you itemize, you could potentially deduct interest paid on any money you borrowed to purchase taxable investments. That includes interest paid on margin loans if you’re trading on margin inside a taxable brokerage account. The total amount of this deduction is capped at the amount of net taxable investment income you have for the year.

It could be a good idea to speak with a financial advisor, who can take a look at your financial plan and determine if there are additional deductions you may be missing.

Minimizing your tax liability as an investor could potentially help you keep more of the returns you earn. While financial advisor fees are no longer deductible, there are things you could consider do to potentially help lower your tax bill.

Tax-loss harvesting may potentially help minimize the amount of tax you have to pay on investments. This simply involves selling off assets that have underperformed at a loss to help offset any capital gains you may have to report for the year.

When harvesting losses inside your taxable account, it’s important to watch out for violations of the IRS wash sale rule, which could cost you tax benefits. The wash sale rule dictates that you can’t replace an asset with a substantially similar one for the purposes of tax-loss harvesting either 30 days before or 30 days after selling an asset at a loss.

If that sounds complicated to you, it may be worth speaking to a financial advisor to see if tax loss harvesting is a strategy that could potentially work for you. Your advisor could also review your portfolio’s asset allocation and asset location to help you fine tune your tax management strategy.

While financial advisor fees are not tax deductible today, that doesn’t mean they won’t be again at some point in the future. Paying attention to changes in the tax code can help you look for opportunities to minimize the amount of taxes you pay on your investments.

Consulting a fiduciary financial advisor could help you determine a plan that factors financial fees and taxes into your overall retirement goals.

Always ask a financial advisor about their pay structure. Some advisors are "fee only" and may charge you a flat rate no matter what, or potentially charge a percentage of your assets under management. Others may be paid commissions by mutual funds, which can be a serious conflict of interest.

Fiduciaries are obligated by law to act in your best interest as they manage your assets or money, and any potential conflicts of interest must be disclosed.

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