The odds are good you're going to need legal advice some day. Maybe you're thinking about getting a divorce, need help writing a lease for the house you want to rent, or were injured in an auto accident and want to sue the other driver.
Regardless of why you need an attorney, you're going to have to pay for the lawyer's legal services. We all know that lawyers aren’t cheap. Can you at least take a tax deduction for attorney's fees? Usually not, but there are some exceptions.
The basic rule is that you can deduct attorney's fees you pay to:
- produce or collect taxable income, or
- help determine, collect, or obtain a refund of any tax.
Simply put, you can take a deduction if you need an attorney's help to make money you’ll have to pay tax on; or if an attorney helps you with a tax matter, like representing you in an IRS audit.
Examples of Deductible Fees
Examples of attorney fees that produce or collect taxable income and that can qualify for a tax deduction include the following:
- Tax advice you may obtain during a divorce case can be deductible—for example, advice on how you and your ex-spouse will deduct home mortgage interest or child care, or whether alimony is tax deductible by the payor spouse or taxable income to the recipient spouse. Make sure your attorney’s bill allocates the fee between tax and nontax services.
- Attorney fees one ex-spouse pays in an attempt to get the other ex-spouse to pay past-due alimony are deductible.
- Estate tax planning: Tax advice your attorney gives when formulating an estate plan is deductible. Again, make sure your attorney’s bill allocates the fee between tax and nontax services.
- You can deduct legal fees related to doing or keeping your job. For example, you can deduct attorney fees you pay to defend a lawsuit filed against you on a work-related matter, such as an unlawful discrimination claim filed by a former employee that you fired.
- Attorney fees you pay to receive your share of a class action settlement in a lawsuit against your employer or former employer are deductible. These will often be directly deducted from your settlement.
- Attorney fees you incur in bringing a discrimination claim—for example, an age discrimination claim--are deductible.
- Attorney fees incurred in a Social Security appeal are deductible to the extent that the benefits obtained are taxable—for example, if 50% of the benefits are taxable, 50% of your attorney fees are deductible.
- Attorney fees incurred to evict a tenant from a rental property are deductible.
Examples of Nondeductible 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 reason is that the money you win isn't taxable
- settling a will or probate matter between your family members
- help in closing the purchase of your home or resolving title issues or disputes (these fees are added to your home’s tax basis)
- obtaining custody of a child
- obtaining child support
- name changes
- legal defense in a civil lawsuit or criminal case that's not work-related—for example, attorney fees you pay to defend a drunk driving charge or against a neighbor's claim that your dog bit and injured her child.
How to Deduct Attorney Fees
Generally, you deduct personal attorney fees as an itemized miscellaneous deduction on Schedule A of your Form 1040 tax return. This means you get a deduction only if you itemize your personal deductions instead of taking the standard deduction. You should itemize only if all your personal deductions, including attorney fees, exceed the applicable standard deduction. Only about one/third of all taxpayer itemize.
Since personal attorney fees are a miscellaneous itemized deduction, they are limited by the two percent rule: They are deductible only if, and to the extent, they (along with all your other miscellaneous deductions, if any) exceed 2% of your adjusted gross income (AGI). For example, if your AGI is $100,000 your attorney fees are deductible only if, and to the extent, they, and any other miscellaneous deductions you have, exceed $2,000 (2% of $100,000 is $2,000).
Attorney fees relating to rental property are deducted on Schedule E and are not subject to the 2% rule. Suits involving discrimination claims are also not subject to the 2% rule. They are deducted as an adjustment to gross income on the first page of your Form 1040.
Attorney Fees for Your Business
If you own a business and hire an attorney to help you with a business matter, the cost is deductible as a business operating expense, subject to a few important exceptions. For example, you can deduct fees paid for:
- collecting money 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
- defending against trademark, copyright and patent claims
- providing tax advice for your business.
If you’re a sole proprietor, these fees are deducted on IRS Schedule C.
If you hire a lawyer to help you start a business—for example, to form a corporation or limited liability company—the cost is currently deductible up to $5,000. Any amounts over $5,000 may be deducted over 180 months.
Legal fees incurred in creating or acquiring property, including real property, are not immediately deductible. Instead, they are added to the tax basis of the property. They may deducted over time through depreciation.
Check with Your Lawyer
If you're concerned about whether you'll be able to deduct attorney's fees, ask your attorney if any of the fees he or she will charge will be tax deductible. You should ask before the attorney does the work.
Also, ask your attorney to prepare a billing a statement that shows clearly what part of the fees are deductible. For example, if you're involved in a divorce, your lawyer's billing statement should show how much time was 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 to 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?