Are Attorney's Fees Tax Deductible? Text Size:

If you haven't been there yet, and without jinxing your luck, the odds are good that at some point in time you're going to need legal advice about something. Maybe you're thinking about a divorce; or you need to make sure that the lease for the house you want to rent out protects you as a landlord. Maybe you're involved in a lawsuit.

Regardless of why you need an attorney, you're going to have to pay for her legal services. Sometimes the fees are high and take a chunk out of your wallet. Sometimes the fees aren't so high, but your budget makes it hard to pay the fees. This is usually when you'll wonder if you can take a tax deduction for those attorney's fees.

The answer, generally, is No. There are some limited circumstances, however, where you can deduct those legal fees and recover at least a little bit of those fees at tax time.

General Rules

The general rule is simple enough: You can deduct attorney's fees that you pay for:

• Trying to produce or collect taxable income, or
• To help in determining, collecting or getting a refund of any tax

In simple terms, you can take a deduction if you need an attorney's help to make money that you have to pay taxes on, or if an attorney helped you with a tax matter, like completing your tax return or represented you in an audit by the IRS. If the legal fees are somehow connected to taxes, you can take a deduction.

There are all kinds of situations that qualify for the tax deduction, such as fees you may pay for:

• Tax advice you may get during a divorce action, such as how you and ex-spouse will take deductions for home mortgage interest or child care, or whether alimony is tax deductible by the payor spouse or taxable income to the recipient spouse
• Trying to get your ex-spouse to pay alimony that's past due, such as by paying your lawyer to write a letter demanding payment or filing a lawsuit against your ex-spouse
• Defending a lawsuit that was filed against you on work-related matter, such as an unlawful discrimination claim filed by a former employee that you fired or a job applicant that wasn't hired; or a criminal suit filed against an employee for embezzlement
• Receiving your share of a class action settlement in a lawsuit against your employer or former employer. For example, your former employer settles a class action claiming that it didn't pay overtime wages as required by the Fair Labor Standards Act. You get a $1,500 check for your share of the settlement, but $2,000 is reported to the Internal Revenue Service as income because you're charged $500 as your share of attorney's fees. Because the income is work-related, you can take a tax deduction for the $500 in fees.
• Advice you got about estate taxes when your attorney drafted your will

So, generally, the fees you can't deduct are the one you pay for advice or help on personal matters or for things that don't produce taxable income. For example, you can't deduct fees you paid for:

• Filing and winning a personal injury lawsuit or wrongful death action for you, because generally these types of money awards aren't included in your gross income, that is, they're not taxable
• Settling a will or probate matter between your family members
• Help in closing the purchase of your home
• Defending you in a civil lawsuit, like personal injury action, or in a criminal action that's not work-related, such as defending you on a drunk driving charge or against a neighbor's claim that your dog bit and injured her child

Taking the Deduction

Generally, you deduct attorney's fees as an itemized miscellaneous deduction on Schedule A of your Form 1040 tax return. You may not be able to deduct all of your fees, though. Miscellaneous deductions are limited by the 2% Rule: You can deduct only the amount of your miscellaneous deductions that's more than 2% of your AGI. Your AGI is the amount you entered on line 38 of your 1040.

Have a Business?

As a business owner, you can take a deduction for the same things discussed above. If you pay an attorney to prepare your taxes or to help the business make money, you can deduct the fees you paid. For example, you can deduct attorney fees you paid for :

• Collecting money that's owed to you by a customer (an "account receivable" or "receivable")
• Defending you or an employee in a lawsuit over a work-related claim, such as a discrimination lawsuit filed by a former employee
• Negotiating or drafting contracts for the sale of your goods or services to customers

Also, you can usually deduct attorney fees you paid in connection with starting up your business or buying an existing business. For example, in 2008 you discovered that ABC Company was for sale and you hired a lawyer to look at the company's tax returns and other business records and to draft a sales agreement. Generally, you can deduct the fees your lawyer charges for services she performs before you actually buy ABC Company.

Generally, you deduct these business-related expenses that same way you deduct other ordinary and necessary business expenses. You need to file Schedule C with your 1040 tax return.

Check with Your Lawyer

If you're concerned about whether you'll be able to deduct attorney's fees, you can always ask your attorney before she does any work for you, if any of the fees she'll charge are tax deductible. Your attorney will be able to tell you what you can deduct.

Also, you should ask your attorney to prepare a billing a statement that shows clearly what part of her fees are deductible. So, for example, if your involved in a divorce, your lawyer's billing statement should show how much time she spent working on how the divorce will impact your taxes, and it should be separate from the other non-tax divorce issues, like the time spent drafting the divorce papers.

Questions for Your Attorney

• My employer hired an attorney to defend me in a discrimination suit. I don't like the way he's handling the case. If I hire you to defend me, can I deduct your fees on my taxes?
• I'm going to file a small claims complaint against my ex-husband to get him to pay alimony that's long past due. Can I take a tax deduction for the costs of filing the complaint and the wages I lost for having to take off work to research the case, file it, and go to court?
• Can I deduct the fees you charged me for suing the person who claimed to hold a deed the house I was buying and clearing my legal title to it? Does it matter that I use part of the home as home office?

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