Don't Double Dip Your Deductions

It’s not news that many items can be used as deductions on your tax return. From Traditional IRA contributions, to donations you make to a charity, you can lower the amount of taxes you may owe by claiming a few of these.

Deducting Professional Fees
One area that often gets overlooked are the fees you pay for professional services. Did you know you can (possibly) claim the fees you pay your tax preparer and financial advisor as deductions?

If you’re filing a long form (itemizing instead of taking the standard deduction), and the total of these fees (and a few others) exceed 2% of your adjusted gross income, you possibly can. There’s a catch though… You can’t double dip.

With many financial advisor’s fees, you are given the option of having the fees directly paid from the investment account, or sending a check. There are benefits to both sides-

If fees are deducted from the account, it saves you time and the hassle of sending a check. It also ensures the bill is paid on time so you won’t be charged late fees.

If the account is a Traditional IRA, the deduction of fees is not considered a true “distribution”. This simply means you won’t have to claim the funds as income and pay more in taxes, or a penalty, for the withdrawal to pay these fees.

A benefit of deducting the fees from a Traditional IRA is that you’re offered a tax free withdrawal for those fees. Since you received a tax break as the funds went in, you’ll pay taxes on the way out. If you’re in a 25% tax bracket, a $1,000 advisory bill would require you to take $1,250 out of your IRA. However, since it’s not actually a distribution, $1,000 actually equals $1,000.

Only One Deduction Is Allowed
However, if you have your advisor pull your fees from a Traditional IRA, you can’t double dip the deduction by claiming the fees on your tax return also.

You also can’t pay for multiple accounts out of your Traditional IRA. Let’s say you have a Roth, Traditional IRA, and a taxable account, all with equal balances. For a $900, only $300 could be deducted from your Traditional IRA. With varying balances, only the proportional balance is allowed.

Completely confused? Let’s look at a few examples:

  • John Doe has a Traditional IRA, and would like for his advisor to deduct the fees from his account. The invoice is $500. John cannot deduct this $500 on his taxes, as he has already received a benefit of paying the fees tax free.
  • John Doe has a Traditional IRA, and would like to send a check to pay the fees on his account. The invoice is $500. John can deduct this $500 on his taxes, as he did not receive a benefit of paying the fees tax free.
  • John Doe has a Traditional IRA and a taxable account. The IRA has a balance of $450,000, and the taxable has a balance of $125,000. If John elects to have the $1,000 in fees paid from the accounts, 78% of the fees can be drafted from the IRA, and the remaining 22% would need to be drafted from the taxable account. In this case, $780 (78% of $1,000) would not be deductible on his taxes, but the remaining $220 would be deductible IF the total amount of allowable deductions were 2% or more of John’s AGI.

Let’s face it; taxes are confusing. There are many software programs available to assist in filing your taxes, but they can’t take every possible consideration into account.

If you aren’t sure if something is allowed or not, it’s best to seek the advice of a professional. Penalties, interest, and the headache of not being sure you did something correctly far outweighs the few hundred bucks a trained professional might cost you.

Michelle Kuehner is a Registered Investment Advisor Representative and Managing Director for Personal Money Planning. She is also a Certified Credit Counselor and Certified Financial Health Counselor, writes Fix Our Budget blog, and has over 24 years of experience in the financial industry.

Photo: ddpavumba, published on 01 August 2013 Stock Image - image ID: 100188090

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