Hidden costs and lost deductions

As you may or may not remember, I do some tax preparation. I say “some” as I just began doing individual income tax preparation last year. Well, this year I had the opportunity to do the taxes of a retiree with significant assets and investment income. And as I saw the total tax liability rise, I began to look for deductions. Finally it struck me that there must be some offsetting investment expenses.

Since she had a broker or financial advisor, there were no research tools or subscriptions to write-off. Most of the interest expenses were directly related to multiple limited partnerships. That left me the investment management fee or trading expenses. I tore the statements apart and found one insignificant fee. So I inquired of my client how the investment manager was paid. She indicated that the advisor, who worked at a wire house, was paid by commission. I asked that she request a schedule of all commissions paid in the tax year. Silly me.

First, before you working people get excited, this fee is a miscellaneous deduction, combined with all other miscellaneous deductions, the total miscellaneous deduction must exceed 2% of your adjusted gross income. And it won’t reduce your alternative minimum tax. I asked a group of financial advisors the best means to identify this expense. They explained that unless it’s a wrap fee, a charge for a bundle of services that is taken directly from the account, it won’t appear on any statement.

And one advisor who worked for several wire houses elaborated that some or all of the commissions and trading costs are added to the cost of the investment and reduce the gain when the investment is sold. And that at some wire houses, some of the expenses may be allocated to the present year expense and the client will never get the tax benefit. You need to ask the institution how the trading expenses are allocated. (Front end loads are also treated as an increase in cost of the investment.) So, unless you audit your statement to confirm the cost of purchase of investments, you’ll never see the trading expense or commissions you pay for investments.

So why do I highlight this expense? One, I want you to be able to identify all your spending. And it’s my belief that commissions and trading costs are hidden and unforgotten expenses.

 

 

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