Investment club members

 can't deduct seminar expenses

If my investment club takes a trip, as a group, to attend a seminar where we will learn more about investing, are the costs of this trip and the seminar fees deductible? The club is a partnership and we report the income from our investment transactions on K-1 forms. V.B., Shelbyville, IN

The IRS is extremely clear on this topic: “You cannot deduct expenses for attending a convention, seminar, or similar meeting for investment purposes.” There’s no real reason for this rule, other than the fact that lots of people would like to attend seminars about investing, and there would be lots of deductions in this area and hence a lot of unwanted paperwork if the IRS were to allow it.

If you participate in any other type of hobby, you are allowed to take a deduction for expenses that directly relate to the production of income from your hobby, as long as the expenses don’t exceed the income you earn from the hobby. But in the world of investing, an area that would actually benefit the IRS greatly if more people learned to be savvy investors, the IRS does not permit tax-deductible education.

There is a way around this rule, if you are determined to learn more about investing and want the IRS to help defray the costs. You are allowed to deduct the cost of fees that you pay for counsel and advice about investments. It would seem to follow that your partnership can hire someone to come to one of your meetings and offer counseling and advice about investing (the same type of information you would get at an investment seminar), and the deduction will stand. Go figure.

If your partnership does incur expenses that are deductible, such as the investment counseling, the partnership will report these expenses as a deduction on the partnership tax return, Form 1065. The deductible amount will pass through to the individual partners on the K-1 form that you mention in your question.

There are other types of expenses that you can deduct in addition to the counseling. Investment clubs are allowed to take deductions for expenses such as these:

•  Safe deposit box rental

•  Fees paid to someone who collects your income

•  Clerical help

•  Office rent

•  Postage and stationary

•  Manuals or reference materials relating to investment decisions

• Cost of copying, producing, and mailing meeting notices

•  Dues paid to National Association of Investment Clubs

Now here’s the tricky part. If you have investment-related expenses on your K-1 form, you can only deduct those expenses on your personal tax return if you itemize your deductions on Schedule A. Because the investment expenses are considered miscellaneous expenses, they are subject to the IRS’s famous paperwork reduction rule that states that you are only allowed to deduct these expenses to the extent that they exceed 2% of your adjusted gross income.

In other words, if your adjusted gross income is $50,000, 2% of that amount is $1,000, and you are only entitled to deduct the part of your miscellaneous expenses such as investment expenses that exceeds $1,000. You have to hire some pretty expensive investment counselors to generate costs that will provide a deduction for each partner.

Here’s one other interesting option. If you choose to attend an investment class at a university, you may qualify for the Lifetime Learning Credit for your tuition costs.

Can I file my tax return over the telephone? I heard there was a new program that lets you do this. J.S., Indianapolis

Some people get to file their tax returns over the phone, using the IRS’s TeleFile program. You folks know who you are. Everyone who gets to use this program received a special invitation from the IRS. If you didn’t get invited, you can’t come to the phone party.

If you received an invitation to TeleFile (and Indiana is one of the test states in which this program is being used), you also received a secret phone number to call. Even if you received the TeleFile info in the mail, you can only use this system if you meet certain requirements, such as you didn’t move, you didn’t add any new little dependents to your family, and your income didn’t jump up over $50,000.

There are no forms to fill out with TeleFile, but only the people with the simplest tax returns get to use this program. As we head into the new century, the IRS is experimenting with lots of different techniques for making tax filing seem as easy as paying the rent. Within the next decade the IRS would like to see everyone using some electronic or automatic means for filing tax returns, anything to avoid having people think about paying their taxes. I think this is supposed to be called progress.