Are Legal Fees Tax Deductible?

It’s tax season. Every year we go through this same national chore, but remembering the numerous deductions that you might be eligible for can make the process all the more worthwhile, though slightly more complex as well. Many people might not be aware that legal fees can be deducted from your taxes depending on your circumstances; while these deductions are generally limited to business or tax cases, they can prove to be another valuable deduction for your personal or business taxes. To be more specific, if the legal fees for your case are to produce or collect taxable income (like operating a business), or if legal fees helped you determine, collect, or receive a refund of any tax, then this legal expense will most likely count as a deduction. To simplify that, a deduction will be available to you if you need an attorney’s help to make income that is taxed, or if you need an attorney’s help with a tax-related matter.

According to the IRS, in general, you can deduct any legal fees related to doing or keeping your job, including any license or regulatory fees that your business needs. Business law advising also counts as a deduction, such as matters concerning entity formation, restructuring, drafting partnership and operating agreements, drafting contract agreements, or negotiating on your business’s behalf. Fees expended in carrying out a business are fully deductible by any business form, whether a corporation, LLC, partnership or sole proprietorship. As the owner of a legitimate business, you can claim the legal fees your company pays as fully deductible business expenses. Otherwise, if you are not the owner, the legal fees will be considered miscellaneous itemized deductions; if you are not actually operating a business, such deductions can be harder to come by, but they are still available. For example, if you are renting your house to someone and need them evicted, those attorney fees are deductible. Likewise, if you are defending against a lawsuit in a business related matter, those fees to will be deductible because they are being spent to keep your job.

There are also unexpected areas that allow you to deduct legal fees as well. Though it might be obvious that tax law fees are deductible, they can permeate a variety of legal issues, from estate planning to domestic relations. For example, though you cannot deduct the fees for a divorce lawyer, getting tax law advice about sharing taxes with your ex counts towards your deduction, as well as any consultation regarding the deductibility of your of spousal support and child support payments. As for estate planning, consulting a lawyer to understand the taxes on your investments also is deductible. For all of these things, ask your lawyer for a bill that shows separate fees which are taxable versus nontaxable services. Of course, it should be noted that you must itemize your deductions, and not take the standard deduction, to claim any legal fee as a deduction.

In order to claim these deduction, you will have to itemize them when you file your taxes, and may be required at some point to provide substantiation of your claimed deductions. For most, these deductions will qualify as miscellaneous deductions, which are entered into Schedule A when filing your taxes; in order to claim these, your total miscellaneous deductions must be greater than 2% of your adjusted gross income.

Mastanduno Law Group wants to help our clients through tax season by giving tax law advice applicable to your personal situation; while the information we’ve given above may be helpful, you should seek personal advice about your unique situation. Likely, such advice will be deductible.