Investors are allowed to deduct expenses incurred in the production or collection of income and in the management and conservation of property held to produce income, even though they were not incurred in the course of a trade or business.

Some expenses allowable include:

• Accounting and tax preparation fees
  
  
  
  
• Bank or brokerage account fees
  
  
  
  
• Fees to manage or set up an IRA if billed and paid separately
  
  
  
  
• Custodial or investment management fees paid on investment accounts
  
  
  
  
• Depreciation of a computer or other equipment to track or select investments
  
  
  
  
• Legal fees
  
  
  
  
• Investment publications and Subscriptions
  
  
  
  
• Quotes or charting services
  
  
  
  
• Online data or news retrieval services
  

While these expenses are deductible, they are subject to various limitations and are never 100% deductible as they would be if you had filed as a trader. High income tax taxpayers with significant capital gains or other income may get -0- benefit from these deductions as they are deductible only to the extent they exceed 2% of your AGI (adjusted gross income). In addition, gross itemized deductions (those listed above plus mortgage interest, real estate taxes, state income taxes paid, charitable contributions, etc) are subject to a further reduction of 3% of your excess AGI over $150,500 ($75,250 if married filing separately). If you have significant income in excess of $500,000 to take one example, you will find that you will only be entitled to deduct a much smaller percentage of your deductions as you would have first believed . It is very difficult to really appreciate how much is actually lost for high income taxpayers until you actually run and look at specific numbers.

The above problems can be sidestepped if you are a qualified trader and report these expenses on Form 1040 Schedule C.

SOME OF THE LIMITATIONS FACED BY INVESTORS

• Margin interest deduction limited to amount of net investment income
  
  
  
  
  
• Not allowed to elect Section 475 Mark-to Market Accounting Treatment
  
  
  
  
  
• Not allowed to take a home office deduction
  
  
  
  
• Investment related expenses allowable only as miscellaneous itemized deductions when they exceed 2% of Adjusted Gross Income (AGI).
  
  
  
  
• Expenses are also subject to phase-out limitation on total itemized deductions and reduced by 3% of AGI in excess of applicable threshold amounts
  
  
  
  
• Cannot expense and immediately write off depreciable assets such as computers, office equipment and furniture.