With a dividend reinvestment plan, or DRIP, if there is a fee charged for the service, can the fee be deducted on my income tax return?

Karin Price Mueller/The Star-Ledger for NJ.com writes: Q. With a dividend reinvestment plan, or DRIP, if there is a fee charged for the service, can the fee be deducted on my income tax return?

-- Drippy investor

Answer. The Brain always loves to hear when people are taking part in regular investment plans. That's the best way to build wealth over time.

DRIPs are an excellent way to create an automated savings plan, said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Berkeley Heights.

Before getting to your tax question, Maye recommends you consider an investment firm that offers a cost-free dividend reinvestment program. For example, he said, TD Ameritrade account holders who enroll in TD's DRIP program do not pay a fee to reinvest their dividends.

In terms of your question, it comes down to what type of costs are being incurred in the DRIP program, he said.

"If the cost is a commission, it is added to the investment's cost basis. In this case, the tax benefit is not realized till the investment is ultimately sold," he said. "Any non-commission-related costs or fees associated with a DRIP program would qualify as Schedule A miscellaneous itemized deductions subject to the 2 percent of AGI limitation."

AGI is adjusted gross income, and you need to know how to make that calculation.

"First, you compute your total of all expenses that fall into miscellaneous deduction categories," said Gail Rosen, a Martinsville-based certified public accountant. "This amount is deductible as an itemized deduction but only -- and to the extent -- it is greater than 2 percent of your AGI."

Rosen said that because it's an itemized deduction, it can only be claimed if you itemize your deductions and don't claim the standard deduction.
Other miscellaneous itemized deductions to consider here include tax preparation costs, employment-related expenses and investment expenses, she said.
One final caveat, Rosen said, is that the deduction for miscellaneous itemized deductions is not allowable for the alternative minimum tax (AMT).

And one other consideration.  While DRIPs are a great way to save automatically, there is no real thing as an auto-pilot investment program. You need to always be vigilant and consider how any automatic investment is impacting your overall financial picture.
"When using a DRIP strategy make sure and diversify to avoid being over concentrated in one stock," Maye said.
Good advice.