Tax-deductible investments and expenses: What is tax-deductible?
Tax-deductible investments give investors a powerful tool that can reduce taxable income and can help improve net returns. The IRS limited what’s deductible after the 2017 Tax Cuts and Jobs Act (TCJA), but several deductions remain. Investors can still lower their tax burden through specific expenses and contributions tied to approved accounts.
This guide breaks down what tax-deductible investments are, which investment expenses still qualify, and how tax-advantaged accounts can support a long-term retirement strategy. Gainbridge does not offer or provide tax or investment advice. For advice concerning your own situation please contact the appropriate professional.
What are tax-deductible investments?
A tax-deductible investment is any contribution or expense that reduces your taxable income under IRS rules. Some deductions come from contributions made before taxes, such as pre-tax 401(k) or traditional IRA deposits. Others come from expenses you incur when investing, such as margin interest.
It’s important not to confuse tax-deductible, tax-deferred, and tax-exempt investments:
- Tax-deductible contributions: Reduce taxable income in the year you make them. Examples include 401(k) and traditional IRA contributions.
- Tax-deferred investments: Postpone taxes until you take withdrawals. Examples include traditional IRAs and deferred annuities.
- Tax-exempt investments: Avoid certain taxes entirely. Examples include municipal bonds, which are typically exempt from federal tax. Roth IRAs offer tax-free growth and distributions when guidelines are met because you fund those retirement accounts with after-tax dollars.
What investment expenses are deductible?
The TCJA eliminated most miscellaneous investment deductions, but under current IRS rules, a few remain.
Investment interest expense
If you borrow money to buy taxable investments, you may be able to deduct the interest you pay on that loan. This falls under the investment interest expense deduction.
Examples include:
- Margin interest: When you trade on margin, you borrow from your brokerage to increase buying power. You may pay interest on this margin loan.
- Investment loans: This is less common than margin interest, but you can deduct interest from personal loans or other types of loans you use to purchase taxable investments.
The IRS limits the investment interest expense deduction to your net investment income for the year. If your interest expense exceeds your net investment income, the IRS lets you carry over the unused portion indefinitely as of now. Importantly, interest tied to tax-exempt investments is not deductible.
Tax-advantaged account contributions
Some tax-advantaged accounts reduce your taxable income, but they’re not investment expenses. Examples include:
- 401(k) and 403(b) contributions: These contributions reduce taxable income in the year you contribute.
- Traditional IRA contributions: These may be deductible depending on income and participation in workplace plans.
- Health savings account (HSA) contributions: HSAs offer three tax advantages: a deduction, tax-free growth, and tax-free withdrawals for qualified medical expenses.
Certain advisory or custodial fees
The TCJA halted deductions for “miscellaneous investment expenses.” This includes most advisory fees, management fees, and financial planning charges. Under current law, these expenses aren’t deductible, and they remain excluded unless Congress changes the rules through new legislation.
Are investment fees tax-deductible?
Under current IRS rules, you can’t deduct most investment fees. This includes advisory fees, custodial charges, and management costs paid from taxable accounts.
For example, brokerage fees, robo-advisor charges, and wealth management costs are all nondeductible in taxable accounts.
Is margin interest deductible?
You can deduct margin interest, but only if you follow IRS rules. Margin interest falls under the investment interest expense deduction. You must use the borrowed funds for taxable investments. Here’s how the IRS handles margin interest.
Deductible only if the loan is used to buy taxable investments
You can deduct margin interest only when you use the borrowed funds to purchase investments that generate taxable income. This includes assets, such as stocks, exchange-traded funds (ETFs), and mutual funds. You can’t deduct margin interest if you used the funds to buy tax-exempt investments.
Deduction is capped at net investment income for the year
The IRS limits the deduction to your net investment income. This category includes taxable interest, ordinary dividends, short-term capital gains, and certain long-term capital gains, if you elect to treat them like ordinary income. If your margin interest exceeds your net investment income total, the IRS won’t let you deduct the excess in that tax year.
Unused amounts can be carried forward
You don’t lose margin interest you can’t deduct in a given year. The IRS lets you carry the unused portion over indefinitely and deduct it from future net investment income.
Other tax-deductible investment options to consider
Even though limits currently exist on investment expenses, investors still have access to tax-advantaged accounts that can reduce taxable income, grow tax-deferred, or offer tax-free withdrawals. These accounts can help lower your tax burden because of their built-in tax treatment.
Each of the following account types offers a different advantage. Choosing the right mix depends on your income, savings goals, and retirement timeline.
Retirement accounts
Retirement accounts remain one of the most powerful ways to reduce your taxable income. Contributions to 401(k), 403(b), and traditional IRA accounts can lower your tax bill in the year you contribute. The IRS imposes contribution limits for each account. Traditional IRAs also include income limits to determine whether contributions are deductible.
Health Savings Account
HSA contributions are tax-deductible, growth is tax-free, and withdrawals are tax-free as long as you use them to cover qualified medical expenses. This structure can make them an efficient savings tool. However, you must have a high-deductible health plan to contribute.
HSAs can double as an additional retirement account because unused balances roll over annually. At age 65, you can use HSA money for any reason, though non-medical withdrawals become taxable typically as ordinary income. This flexibility can help support both near-term medical costs and long-term planning.
529 education savings plans
While contributions to a 529 education savings plan aren’t deductible on your federal tax return, many states offer tax deductions or credits. Your investment growth inside this type of plan is tax-free. Withdrawals are also tax-free when used for qualified education expenses, such as for tuition and books.
Using tax benefits to strengthen your retirement investment strategy
Tax-deductible investments and eligible expenses can give investors meaningful ways to decrease their tax bill and help improve long-term returns. While federal law limits many deductions, key opportunities remain through the investment interest expense deduction and contributions to tax-advantaged accounts.
A core element of most investment strategies is to support steady growth while minimizing your tax liability. Gainbridge digital-first annuities provide fixed growth, the option to defer taxes, and a guaranteed income stream in retirement.
Explore Gainbridge today to see how fixed annuities can strengthen your retirement strategy with predictable interest rates and 100% principal protection. They also come with no hidden fees or commissions.
FAQ
What investment expenses are deductible?
Under current IRS rules, the main investment expense you can deduct is investment interest. This is the interest you pay on loans used to purchase taxable investments, such as stocks, ETFs, mutual funds, and corporate bonds. Most advisory, management, and financial advisor fees are not deductible.
Are investments tax-deductible?
Some account types offer tax-deductible contributions. These include traditional IRAs, 401(k)s, 403(b)s, and health savings accounts. Other accounts — like 529 plans — can provide state-level tax deductions or credits.
This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. Gainbridge does not offer or provide tax or investment advice. For advice concerning your own situation please contact the appropriate professional. The GainbridgeⓇ digital platform provides informational and educational resources intended only for self-directed purposes. Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Investing involves risk, including the loss of principal. When using a margin account, you can borrow funds from your brokerage firm to purchase securities, using the purchased securities as collateral. However, if the value of these securities declines, the value of the collateral also decreases. This can lead to your firm taking action, such as issuing a margin call or selling assets in your account, to maintain the required equity level. It is crucial to understand the significant risks associated with trading securities on margin. You could lose more than your initial deposit.
