19.15 Checklist of Deductible Investment Expenses

The following investment expenses are deductible as miscellaneous expenses on Schedule A subject to the 2% adjusted gross income (AGI) floor.

• Accounting fees for keeping records of investment income.
• Bank deposit loss if not federally insured (18.5).
• Casualty or theft losses of income-producing property such as stock certificates, but not rental or royalty property; the deduction is figured on Form 4684 (18.13) and entered on Schedule A.
• Fees for collecting interest and dividends. Also deductible are fees paid to a bank that acts as dividend agent in an automatic dividend reinvestment plan of a publicly owned corporation. Costs of collecting tax-exempt interest are not deductible; expenses deducted on an estate tax return are also not deductible. Fees paid to a broker to acquire securities are not deductible but are added to the cost of the securities. Commissions and fees paid by an investor on the sale of securities reduce the selling price; a dealer, however, may deduct selling commissions as business expenses.
• Fees to set up or administer an IRA. The fees must be billed and paid separately from the regular IRA contribution.
• Guardian fees or fees of committee for a ward or minor incurred in producing or collecting income belonging to the ward or minor or in managing income-producing property of the ward or minor.
• Investment management or investment planner’s fees. However, fees allocated to advice dealing with tax-exempt obligations are not deductible.
• Investment fees from non–publicly offered mutual fund, shown in Box 5 of Form 1099-DIV.
• Legal costs (19.17).
• Premiums and expenses on indemnity bonds for the replacement of missing securities. If part of the expenses are refunded in the year the expenses are paid, only the excess expense is deductible. A refund in a later year is taxable income to the extent the expenses were deducted and reduced your tax (11.6).
• Proxy fight expenses where the dispute involves legitimate corporate policy issues, not a frivolous desire to gain membership on the board.
• Safe-deposit box rental fee or home safe to hold your securities, unless used to hold personal effects or tax-exempt securities.
• Salary of a secretary, bookkeeper, or other employee hired to keep track of your investment income.
• Subscriptions to investment services.

Planning Reminder

Travel to Check Investments

Travel costs of a trip away from home (20.6) to look after investments, or to confer with your attorney, accountant, trustee, or investment counsel about the production of income, may be deducted as miscellaneous itemized deductions subject to the 2% of adjusted gross income floor. If you have investment property in a resort area, keep proof that the trip was taken primarily to check your investment property, not to vacation.

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Computer used to manage investments.

Subject to the 2% floor, depreciation may be claimed (42.10).

Managing investment property.

Expenses incurred in managing property held for income are deductible, even if the property does not currently produce income. Expenses incurred to maintain or conserve the property are also deductible.

Rental or royalty expenses.

Expenses of earning royalty or rental income are deducted directly from the income, rather than as itemized deductions subject to the 2% AGI floor.

Filing Tip

Deduction for Credit Card Fees To Pay Tax

Companies authorized by the IRS to process credit card or debit card payments of taxes charge a convenience fee. A deduction for the convenience fee may be claimed on Line 23 of Schedule A as an “other” expense subject to the 2% floor, along with investment management costs (19.15). The convenience fee should not be included on Line 22 of Schedule A with tax preparation fees (19.16).

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Nondeductible travel costs.

Investors may not deduct the costs of these types of trips:

• Trips to investigate prospective rental property.
• Trips to attend a convention, seminar, or similar meeting that deals with investment, financial planning, or the production or collection of income. Convention costs are deductible only in the case of a business activity (20.12).
• Trips to attend stockholder meetings. However, in a private letter ruling, one stockholder was allowed a deduction. He owned substantial stockholdings that had lost value because his corporation had been issuing stock to the public at prices below book value. He went to the annual shareholders’ meeting to present a resolution requesting management to stop the practice; the resolution passed. Under such circumstances, the IRS held that the trip was directly related to his stockholdings and allowed him the deduction. The IRS distinguished his case from a ruling that bars most stockholders from deducting the cost of travel to an annual meeting. Here the stockholder’s purpose in getting the resolution passed was more closely related to his investment activities than if he had attended the meeting, as most stockholders do, to pick up data for future investment moves.

Caution

Investment Seminars

You may not deduct the cost of an investment or financial planning seminar or similar meeting.

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Hobby expenses.

Deductions for hobby expenses are subject to limitations (40.10).

Home office of an investor.

An investor may not deduct the costs of an office at home unless investing constitutes a business. For example, you get no deduction for use of a home office in your residence where you manage your investments and read financial periodicals and reports. These activities are not considered a business.

Filing Tip

Tax Advice and Tax Return Preparation

Subject to the 2% AGI floor, you may deduct on your 2012 return fees paid in 2012 for preparing your 2011 return or a refund claim for 2011 or an earlier year. You also may deduct 2012 payments of fees to practitioners for representing you at an examination, trial, or hearing involving any tax. Legal fees incurred in defending against a tax imposed by a foreign country are also deductible. However, legal fees incurred in reducing an assessment on property to pay for local benefits are not deductible; the fees are capital expenses which are added to basis.

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