Yes, it's that time again. Tax season is here and, if you're like most people, you could probably use all the help you can get; especially when it comes to staying on top of changing tax law. On January 16th, the Supreme Court unanimously affirmed in Knight v. Commissioner, that a trust's investment advisory fees are generally not fully deductible. The court held that investment advisory fees paid by a trust are fully deductible if they "would not have been incurred if the property were not held in such trust; otherwise, they're subject to the 2% floor and must exceed 2% of the trust's adjusted gross income to be deductible". Essentially, individual investors who pay investment advisory fees are only allowed to claim an itemized deduction for that expense if these fees together with certain other "miscellaneous itemized deductions," such as unreimbursed employee expenses and tax expenses, exceed 2% of the individual's adjusted gross income.

Example:

If your Adjusted Gross Income (AGI) is $200,000 and you pay $3,500 in investment advisory fees and have $900 in other miscellaneous itemized deductions totaling $4,400, under the new regulation, you will only be allowed to deduct $400 not $3,500, as a result of the "2% floor" rule.

However, the ruling does allow for some fees to be fully deductible. To be fully deductible, these fees had to be those that "may have an unusual investment objective, or may require a specialized balancing of the interests of various parties." Also, if the costs incurred in administering a trust wouldn't have been incurred if the property weren't held by a trust, they may be deducted without regard to the floor. As a result of this regulation, trust companies may have to make changes in the way they bill clients such as unbundling their fees and what costs to allocate to "unusual" and "uncommon" expenses.

Unfortunately, many trust companies or investment firms don't break out their investment-fee charge from other fees but bundle them into a single fee instead. By not unbundling fees to categorize those that are "unique" products or services and "common" ones, you could end up paying more taxes than you need.