Investors, be sure to claim your investment expenses on the 2016 tax return. If it’s done properly, you can save hundreds, maybe even thousands, of dollars over the years. But you have to do it correctly, or you could get into hot water.
What are investment expenses and how can you claim them? This can be a lucrative claim because all other income of the year is reduced by these charges. Because of its position on the tax return, this deduction reduces not only taxable income, but net income too, which means you may get more tax benefits from being eligible for more refundable and non-refundable tax credits.
There are two main types of investment expenses that can be claimed. The first is the most obvious: you can claim many of the direct costs associated with investing, such as the fees you pay your investment counsel or accountant for making the required tax calculations, although there are some tax pitfalls to be aware of here.
The second type of claim involves deducting interest paid on investment loans in order to reduce your net and taxable income. Here, too, there are some special rules. Let’s take a closer look at some of the tips and traps.
What kind of direct investing costs can you claim? You can deduct as a carrying charge the fees paid to a financial, investment or wealth advisor or advisory firm, for providing advice on buying or selling securities, custody of the assets, and the account record keeping and administration of those assets, as long as this is the principal business of this individual or firm. Transaction commissions, however, are specifically excluded; commissions on sales are recorded as outlays and expenses used to reduce your capital gains or increase losses on the disposition of your assets, while commissions on purchases are added to the cost base of the asset acquired. Also excluded are the costs of general financial planning services.
There are also specific rules around the claiming of tax preparation fees relating to investors. Only a portion of these fees may be deductible. That is, unless you are in the business of buying and selling securities (an active trader), or have a rental property, only the portion of the tax preparation fees relating to the investment earnings you have as a passive investor will be deductible. Therefore, it’s important to get a separate accounting for the costs of those calculations. However, if you pay your accountant to represent you in justifying your tax filings in a tax audit, those fees will be fully deductible.
Finally, you used to be able to claim the cost of a safety deposit box, but no longer. That deduction was eliminated in 2013. Also not deductible are fees paid for newspaper, newsletter or magazine subscriptions.
Next time: When can you claim interest on investment loans?