For tax purposes, investing means earning money through activities that make money but are not businesses--for example, purchasing stocks or real estate or earning interest on savings accounts. The IRS calls such activities income-producing activities. Investing costs money. You can deduct all ordinary and necessary expenses you incur to produce income, or to manage property (including real estate) held for the production of income. This includes:
- fees you pay to a broker, bank, trustee, to collect investment income, such as your taxable bond or mortgage interest, or your dividends on shares of stock
- attorney or accounting fees you pay to produce or collect taxable income
- fees you pay for counsel and advice about investments that produce taxable income (this includes amounts you pay for investment advisory services)
- monthly service charges you pay to a bank to participate in an automatic investment service
- rent you pay for a safe deposit box if you use the box to store taxable income-producing stocks, bonds, or other investment-related papers and documents (if you also use the box to store tax-exempt securities or personal items, you can deduct only part of the rent), and
- office expenses, such as rent and clerical help, that you pay to make your investments and collecting the taxable income from them.
In addition, if you own an interest in a partnership, S corporation, real estate mortgage investment conduit (REMIC), or a nonpublicly offered mutual fund, you can deduct your share of that entity's investment expenses.
Investment Expenses You Cannot Deduct
However, not all investment-related expenses are deductible. For example, you cannot deduct:
- fees you pay to a broker to acquire investment property, such as stocks or bonds (you must add such fees to the cost of the property)
- state and local transfer taxes you pay when you buy or sell securities (you must add such taxes to the cost of the property)
- investment fees paid by publicly-offered mutual funds (these funds do not pass investment expenses through to you; instead, the dividend income they report to you is already reduced by your share of investment expenses)
- expenses you pay to attend a convention, seminar, or similar meeting for investment purposes, or
- expenses you incur to produce tax-exempt income.
In addition, your deduction for investment interest expenses is limited to your net investment income for the tax year. You can carry over the amount of investment interest you could not deduct because of this limit to the next tax year. The interest carried over is treated as investment interest paid or accrued in that next year.You determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income.
Miscellaneous Itemized Deduction
Investment expenses are a miscellaneous itemized deduction. This means they are deductible only if and to the extent they, along with your other miscellaneous deductions (if any), exceed 2% of your adjusted gross income. Other miscellaneous itemized deductions include unreimbursed job expenses, medical and dental expenses, tax preparation fees, and hobby expenses.
Example: Ladonna, a single taxpayer, has an adjusted gross income of $50,000. She may deduct her miscellaneous itemized deductions only to the extent that they exceed 2% of $50,000, or $1,000. This year she had $100 in tax preparation fees and $1,100 in investment expenses. Her total miscellaneous itemized deductions are $1,200, but because of the 2% of AGI limit, she may only deduct $200 of this amount—the amount that exceeds $1,000.
For detailed guidance on tax deductions for investments, refer to Irs publication 550, Investment Income and Expenses.