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Deductible Investment Expenses

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Personal Finance

February 3, 2023

Laws have changed, meaning fewer deductions for many

Maximizing your tax deductions can potentially reduce your taxes owed, which is probably on just about everyone’s priority list these days. Although, as the years go by, there are fewer deductions allowed related to investment expenses with the introduction of the Tax Cuts and Jobs Act of 2017 (TCJA). Changing laws has created confusion around what can be deducted and what is not eligible. It is also likely that fewer people are now itemizing their tax returns. Knowing what the options are can be helpful at tax time.

What is deductible?

You can still deduct some investment-related expenses on your federal income tax return. If you subscribe to any professional investment publications including magazines and newspapers that have an associated cost, such as Barron’s, these are considered deductible.

If you itemize your tax return, you may be able to claim investment interest expenses as a deduction, which is any interest on money borrowed to purchase taxable investments. This amount would not include municipal bond interest or other income taxed at lower, long-term capital gains tax rates. Interest on any margin loans or investment property loans would be included. Although, the amount you can deduct is capped at your net taxable investment income for the year with any leftover interest expense carrying over to the following year for potential future tax reductions.

So how is your deductible investment interest expense calculated? Once you determine your net investment income for anything taxed at your ordinary income rate, then you need to compare this total with your investment interest expenses. If your investment interest expenses are less than your net investment income, the whole investment interest expense is deductible. If this is not the case and the investment interest expenses are more than the net investment income, any expenses up to the net investment income amount are deductible while the rest would be carried over.

What is not deductible?

There are some investment costs that are considered to be part of your basis and rather than being tax-deductible, they affect your overall gain or loss when you sell. These types of expenses include broker’s commissions and stock purchase fees. Other non-deductible items include safety deposit box fees, and costs to attend educational seminars and stockholder meetings. Also, expenses that were once considered miscellaneous itemized deductions, such as fees for investment advice and accounting advice, were eliminated for 2018 to 2025. At the end of 2025, Congress can make this rule permanent. Although losing investment-related deductions is hard to accept, many taxpayers probably won’t notice much of a large difference in tax returns.

What about qualified dividends?

When it comes to qualified dividends that have preferential tax treatment, they are not considered investment income as related to the investment interest expense deduction. Qualified dividends are typically taxed at the capital gains tax rate, while ordinary dividends are taxed at federal income tax rates.

It is always recommended to consult with a tax professional to discuss investment-related expenses and tax strategies. If you have investment or investing strategy questions, you may also schedule a call on Bayntree’s online calendar by selecting the date and time that is most convenient for you. You can also always reach us by emailing hello@bayntree.com.

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Bayntree Wealth Advisors provides comprehensive financial planning and wealth management. The Bayntree team specializes in all aspects of financial health, including retirement planning, risk management, investment advice, tax strategies, estate planning, and insurance.

Bayntree does not provide specific legal or tax advice. Please consult with your tax advisor or legal professional for guidance with your individual situation.

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