Investment Fees on Illinois tax return

[tremortime]

I'm finding conflicting information about whether I can deduct my tax advisor fees on my IL tax return. I realize that after 2017 you can no longer do that FEDERALLY, but I am wondering about on my STATE return specifically. I called Turbotax and the rep chatted with a CPA who was finding conflicting information on this in her research. The Turbotax software has a section for IL that says "you can reduce your Illinois income by the amount of expenses used to maintain investments that are not subject to tax on your federal return, but are taxable in Illinois. Also, include expenses you couldn't deduct on your federal return because you took a federal credit related to those expenses." So if I paid a 1% fee to my financial advisor to manage a traditional IRA and a 1% fee to manage a separate roth IRA are those management fees deductible? If so is that total amount what I would enter in this section?

Thank you!

[AmyC]

IL Instructions refer you to 2023 IL-1040 Schedule M Instructions which shows line 17 has expenses for federally exempt income or qualified federal credit so you may have a potential share of a brokerage fee for any exempt portion of your portfolio.

A traditional IRA is not federally exempt but a ROTH has the potential to go both ways.

The federal government for many years allowed deductions related to making money that could be taxed and many states still do. The federal is expected to have it back for 2026 and your brokerage fees may end up as an itemized deduction then.

[tremortime]

Thank you for this information. I'm having trouble understanding the answer. So are you saying I could enter the management fees in this section of Turbotax on the state portion for the ROTH account, but not the traditional?

Thanks for the clarification!

[RobertB4444]

Correct.  Traditionally the brokerage fees are deductible for money that is taxed, not for money that isn't.

@tremortime 

[Jbtax · Accepted solution]

This is incorrect. Illinois allows you to deduct investment management fees on income that is taxable in Illinois but is exempt from federal income tax. Income from Roth retirement accounts is generally not taxable federally or in Illinois, so in this case the deduction for investment management fees on your Roth IRA is not deductible in Illinois.

The most common use case for deducting investment management fees on schedule M of your Illinois return is investment management fees on state/municipal bonds. Referred to on your federal return as tax-exempt interest income. Remember, federally tax-exempt interest income is taxable in Illinois if the state/municipal entity paying interest is not located in Illinois. 

Now, assuming you have federal tax-exempt interest income that is taxable in Illinois, and you paid an investment professional for managing the account in which your tax-exempt interest was generated, you can generally calculate the amount to deduct from Illinois income by: (1) calculate the portion of your investment income in the account in which you’re paying investment management fees that’s allocable to tax-exempt interest. eg tax-exempt income divided by total investment income equals the percentage of investment income derived from income that is exempt from federal tax and taxable in Illinois. (2) apply the percentage from (1) to the investment management fees you paid in the account for which you received income that is exempt from federal tax and taxable in Illinois. eg you calculated 15% in step (1) and you paid $1,000 in investment management fees. You can deduct $150 on schedule M on your Illinois tax return. 

A couple general notes. Often people have multiple investment accounts, the calculation described above is to ascertain the Illinois deduction from a single account. So if you have multiple investment accounts, you may need to run that calculation for multiple accounts and report the sum of the deductible amounts from each account on your Illinois return. 

Also, the deduction calculation only applies to investment accounts that hold investments that produce federal tax-exempt income. So you may need to review your accounts to see which accounts to run the calculation for, but you do not want to perform the calculation generally for all your investment accounts. 

Lastly, Illinois does not tax income from qualified retirement accounts AND qualified retirement accounts do not produce portfolio income on your federal return, they produce ordinary income on your federal return when you take a distribution (assuming the retirement account is traditional or pre-tax. Roth accounts generally do not produce taxable income when you take distributions ). In any case, you should never deduct investment management fees from qualified retirement accounts on your Illinois income tax return. 

[tremortime]

Thank you for taking the time to provide such a thorough answer!