If you haven't been there yet, and without jinxing your luck, the odds are good you're going to need legal advice some day. Maybe you're thinking about a divorce, or you need help writing a lease for the house you want to rent.
Regardless of why you need an attorney, you're going to have to pay for the lawyer's legal services. Can you take a tax deduction for those attorney's fees? Usually not, but there are some exceptions.
The general rule is simple enough: You can deduct attorney's fees 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 you have to pay taxes on, or if an attorney helped you with a tax matter, like representing you in an IRS audit. If the legal fees are somehow connected to taxes or taxable income, you can take a deduction.
Is There 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 case, such as how you and your 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 past-due alimony
- Defending a lawsuit filed against you on work-related matter, such as an unlawful discrimination claim filed by a former employee that you fired
- 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. You get a $1,500 check for your share of the settlement, but $2,000 is reported to the IRS 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
Generally, you can't deduct fees paid for advice or help on personal matters or for things that don't produce taxable income. For example, you can't deduct fees for:
- Filing and winning a personal injury lawsuit or wrongful death action - the money you win isn't included in your gross income and so it's 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 or criminal case 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
How and How Much?
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 two percent rule: You can deduct only the amount of your miscellaneous deductions that's more than two percent of your adjusted gross income (AGI) - 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. For example, you can deduct fees paid for:
- Collecting money that's owed to you by a customer
- 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.
Generally, you deduct these business-related expenses the 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.
Also, ask your attorney to prepare a billing a statement that shows clearly what part of her fees is deductible. So, for example, if you're 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. It should be separate from the other nontax 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?