Are mutual fund expense ratios tax deductible?

The short answer to whether mutual fund expense ratios are tax deductible is "No," but the long answer, however, is more complicated. The IRS publishes a document titled "Publication 529 - Miscellaneous Deductions" that provides a long list of allowable write-offs. Generally, expenses are deductible if they exceed 2% of the taxpayer's adjusted gross income or AGI. For example, a taxpayer with an AGI of $100,000 cannot write off his first $2,000 of miscellaneous expenses, but anything above that amount is deductible per IRS rules. According to Publication 529, some investment-related costs are eligible for deductions. For example, "clerical help and office rent in caring for investments" and "investment fees and expenses" are deductible expenses.

It may seem like mutual fund expense ratios fall into this category, but there is a catch. Miscellaneous expenses are only deductible if they produce or collect taxable income that can be included in your AGI. Specifically, page 10 of Publication 529 states, "You can deduct investment fees, custodial fees, trust administration fees, and other expenses you paid for managing your investments that produce taxable income."

In the case of mutual fund expense ratios, IRS rules indicate the fees paid to investment managers reduce a person's AGI and are therefore not deductible. For example, a stock fund that returned 10% and had an expense ratio of 1% results in a taxable gain of 9%. Investment fees are already being taken out of the AGI equation so deducting them on your tax return is double-dipping.