How to File Investor Expenses for Taxes

Investment expenses are defined as any expense required for the production and collection of investment income or the management, conservation or maintenance of investment property. While investment income is 100-percent taxable, the expenses necessary to produce that income are often limited. Here's where and how to calculate and report investment interest on your tax return.

Instructions

Difficulty: Moderately Easy

1. Know the kinds of expenses that qualify for investment expense deductions. They include accounting and clerical fees for record keeping, fees for managing, maintaining and repairing investment property, broker fees, tax planning fees, investment services fees, safe deposit box fees for storage of investment documents, collection and proxy fight costs for disputed investment income, IRA setup and administration fees, and certain attorney fees related to investment property. In some cases, investor education classes and materials are also deductible.
2. Determine where to report the expenses. Most investment related expenses are reported on Schedule A of the individual's tax return on the line called "Investment Expense." These expenses are subject to a 2% floor. This means only the amount greater than 2% of the adjusted gross income (AGI) reported on page 1, line 37, is deductible.
3. Calculate the deductible portion of the expense. For example, if a taxpayer's AGI is $45,000, and the total investment expense is 6,000, then the deductible expense is $6,000 minus $900 (2% of $45,000), or $5,100. The higher your AGI, the more you are taxed on your investment income and the more you lose in deductible investment expenses.
4. Recognize that some investment expenses are fully deductible. For example, if you own investment property such as residential rentals, oil and gas lease property or farm property, you will report the income or royalties on Schedule E or Schedule F. If this is the case, all the expenses related to these activities are also reported on these schedules, and they are 100-percent deductible against the income.
5. Watch out for "hidden" investment expenses, especially on financial investment brokerage statements. Brokerage houses have a way of masking the fees they charge to manage customers' accounts, and you often have to search the statements to find them. They may be called "other debits." or "miscellaneous expenses," but they are required to report them somewhere in the document. Report these expenses on Schedule A. They are subject to the 2% floor.