Increase Your After Tax Investment Returns With these Tax Deductions

January 28, 2008

As the tax forms for last year’s investment income start to arrive in the mail we’re rudely reminded of the effect that taxes have on our investment earnings.  Especially when we lose money and still have to pay taxes, my Oakmark International fund was down about $100 for the year but generated over $1000 in capital gains, yikes!

One thing we can do to reduce the tax bite is to be aware of the tax deductions that are available for investing expenses. J.K.Lasser offers the following checklist of deductions for investors. Just make sure any investment expense deductions you take are well documented. Dont Mess With Taxes recently warned us that IRS audits are on the rise.

Expenses You Can Deduct

  • Legal fees: If you sought legal advice regarding your investments, you can deduct those fees.
  • Professional fees: You can deduct fees you paid to your accountant in compensation to provide you with advice about the tax effects of certain investment transactions.
  • Fees for investment advice: You can deduct payments to a broker or an investment manager to manage your stocks and other investments.
  • Books and magazines regarding investments.
  • Safe deposit box fees, to the extent that you store your securities or other investment paperwork in the box.
  • Fees you pay directly to your IRA or Keogh custodian.
  • Traveling costs related to your investments, such as trips to your broker’s or investment advisor’s office and trips to look after investment property.
  • Home computer costs if you use the computer to manage your investment activities. You generally must depreciate the computer using the straight-line method.
  • Cost of software you use to manage your investments. In certain circumstances you may need to depreciate the software.
  • Service charges you pay as part of a dividend reinvestment plan.

Expenses You Cannot Deduct

  • Broker’s commissions that you pay for buying and selling securities. These affect your tax cost and the ultimate gain or loss on their eventual sale.
  • Fees charged by your bank for check writing.
  • Seminars on investments and investing strategies.
  • Expenses of attending a stockholders’ meeting, even if you own stock in the company and the meeting would be useful toward making further investments.
  • Any expenses you incur toward generating investment income that’s exempt from taxes (such as municipal bonds).

Where Can You Take These Deductions?
 
You deduct these expenses as miscellaneous expenses on Schedule A. Altogether, these miscellaneous expenses must add up to more than 2% of your Adjusted Gross Income (AGI) before you can take the deduction. And even then you only get to deduct the amount above the 2% limit.  You should keep track of your investment expenses, because they can add up quickly, and they may help reduce your taxable income.

Ben

Will this article help you save or earn more money? Get others like it simply by entering your email address below. Your email is used only for delivering daily money tips and you can opt out of delivery at any time. Click here to see all your free subscription options.

  

Ben

Ben Edwards, the founder of Money Smart Life, saved up enough to buy a Nintendo back when he was 12 years old. When he used the money to buy shares of Wal-Mart stock instead, he knew he wasn’t like the other kids… His addiction to personal finance has paid off for his family and now he’s helping you to afford the life that you want. Check him out on the web at Google Plus, Twitter and Facebook.


All posts by

Comments

6 Responses to Increase Your After Tax Investment Returns With these Tax Deductions

  • Sadie

    NO Comment – Just a Question?

    “Fees you pay directly to your IRA or Keogh custodian” –
    Are these fees to be reported each year or are they reported once withdrawals begin?

  • Marginal-Utility

    Does “Fees for investment advice: You can deduct payments to a broker or an investment manager to manage your stocks and other investments” include mutual fund expense ratios? Technically that is for advice and is a ‘management fee’. Thanks!

  • bill

    Hi,

    Thanks for the timely advice. I, too, ended up on the down side, but had capital gains distributions and therefore have a tax liablility.

  • Bad Credit Loan

    Thanks for the post. It’s extremely helpful. I did not really know some of the points, like broker’s commissions, professional fees and legal fees.

Trackbacks/Pingbacks

  • Claiming Investment Losses on Your Taxes | Money Smart Life
  • Tax Returns and eBay Tax Tips | Money Smart Life