Investment Fees Deduction Is Gone. Now What?
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Your Money Briefing.
Money and market stories from The Wall Street Journal.
I'm J.R. Whalen in New York. The tax deduction on investment fees was enjoyed by millions of taxpayers. But now that it's gone away, you have options. We'll discuss in a moment. But first, these money headlines. While April's unemployment rate dipping below 4% for the first time since 2000 prompted some observers to hearken back to that time when the economy was poised to overheat, prompting a series of interest rate increases by the Federal Reserve, The Wall Street Journal economics team points out the economy looks different in many ways today than it did in 2000. Today, economic growth has been less robust, a smaller share of American adults work, and wage gains are modest. The potential upshot to the more measured gains of the past decade is an economic expansion so far that has avoided overheating and could persist without tipping into recession.
Oil prices continue their rise, lifted by falling OPEC production and concerns that fresh sanctions on Iran could further stifle crude output. Geopolitical tensions have been a key supporter of crude prices in recent weeks as traders await a decision by President Trump on whether the U.S. will pull out of the 2015 nuclear deal and reimpose sanctions on the oil-exporting country. This is your Money Briefing from The Wall Street Journal. Welcome back, everybody. Many taxpayers enjoyed a tax deduction for investment fees. We say enjoyed, past tense, because the new tax plan repealed the deduction in a move that wasn't noticed by many. But Wall Street Journal tax reporter Laura Saunders did notice it, and she's here to offer some tips on what to do now that the deduction is no longer available.
So Laura, this was a popular deduction, but it wasn't available or useful to everyone out there.
Yes. Well, there are many kinds of investment fees. This was a deduction that you got for investment advice that you paid for. So if you pay an advisor maybe 1% a year to be smart for you, you could deduct this fee. It was not the fee that you paid Fidelity to manage a mutual fund for you or an ETF or to Vanguard or something like that. This is the fee you pay the advisor. This was deductible on your Schedule A as a miscellaneous deduction, but there were limits to it. Not everybody got it. It had to be more than 2% of your gross income, adjusted gross income. And also, if you were in the alternative minimum tax, you didn't get it. But there was still, it's going to be a missed deduction because more and more money is in these fee-based accounts.
So at a time when the fees are rising, the deduction is going away.
You did point out in your story that investors have trended toward fee-based accounts rather than commission-based accounts. And people in that situation will miss this deduction a lot.
Yeah, I think so. And I think it's a really good time to refocus on your fees and what you're paying who and what value you're getting for your money because fees can really eat up those returns. Right.
The elimination of this deduction hits investors in hedge funds and partnerships while people invested in mutual funds and ETFs won't be as adversely affected. Why is that?
That's because if you invest directly in a mutual fund, if it's in a taxable account, now if it's in an IRA, there are no taxes while you hold it until you take the money out. But if you have your money in a taxable account, it's in an ETF or a mutual fund, You pay tax on the gains after the fees, not before the fees. And that's going to wait, tilt the table in their direction, as it were.
And you suggest investors impacted by this deduction elimination should take inventory of what fees they face, essentially what's free and what isn't in their accounts. And we were talking off air for a moment, and a lot of investors, you point out, don't even know what sort of fees they're up against in their accounts.
Yes, there's a really stunning survey from an outfit called Cerulean Associates. Last year, they surveyed a lot of investors and 40% either didn't know what they paid in fees for advice or they thought it was free.
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