Are Legal Fees Tax Deductible?

Whether or not an attorney fee may be tax deductible will typically depend on if the fees are associated with a personal legal issue or a legal issue pertaining to a business. In general, attorney fees related to a personal legal matter, such as a divorce or legal separation, are usually not considered to be tax deductible.

Some examples of attorneys’ fees that may not be eligible for a tax deduction include:

• Attorneys’ fees paid for legal advice on personal tax issues (note that this does not include tax issues or tax advice for the purposes of business taxes);
• Attorneys’ fees paid to defend someone against a civil claim or criminal charges that arise in connection with a political campaign; and/or
• Attorneys’ fees paid in association with various types of personal legal issues, including:
  • Child custody cases,
  • Personal injury lawsuits,
  • Civil claims or criminal charges concerning a personal relationship (e.g., fees paid to defend a person against domestic violence charges),
  • Breach of promise to marry (e.g., engagement ring cases, breach of contract to marry, etc.),
  • Claims, settlements, or purchases related to real estate and/or property,
  • Title preparation or disputes over title to property, and
  • Estate planning matters (e.g., setting up a trust or drafting a will).

On the other hand, if the legal fees are being paid in connection to legal services provided for a business matter, such as a business contract, then they will be considered to be a business expense and thus will be fully tax deductible.

A good rule of thumb to remember the rules regarding whether an attorney fee is tax deductible or not is that you will most likely be able to deduct an attorney’s fee from your taxes if you are trying to do one of the following activities:

• If you are trying to generate or collect taxable income (e.g., for a business); and/or
• If you need help determining the amount of a tax refund, collecting a tax refund, or obtaining a refund on business or individual taxes.
  • It is important to note that legal fees paid to lawyers for providing legal advice on most personal tax issues will not usually qualify for a tax deduction unless it is specifically for an ordinary and necessary tax expense like collecting a tax refund.

In other words, you will most likely be permitted to deduct attorneys’ fees from your taxes if you used the services of a lawyer to either make money that you are required to pay taxes on (e.g., earned income) or if a lawyer is assisting you with a tax matter, such as representing your business during an audit by the U.S. Internal Revenue Service (IRS).

Basically, if you paid for legal fees that are related to taxes or taxable income, then you will be able to deduct them from your taxes. This is especially true if the legal fees are associated with a business matter, such as legal fees paid to an attorney to help you file the Articles of Incorporation for your business.

When Can You Deduct Legal Fees?

As mentioned above, a good rule of thumb to follow is that if a legal fee arose out of trying to generate or collect taxable income, then those legal fees will most likely be eligible for a tax deduction. Some common examples of when a person may be able to deduct legal or attorneys’ fees from their taxes include:

• Legal fees used to pay a lawyer when suing another individual for back rent owed or for collecting royalties on a piece of property;
• Legal fees paid for representation in an employment lawsuit that involves a claim for whistleblowing or a lawsuit for unlawful discrimination;
• Legal fees paid directly towards necessary and standard operating expenses for a business;
• Legal fees used to pay a lawyer to help them with the adoption process (note only if the individual qualifies for the federal adoption tax credit);
• Legal fees paid to hire a lawyer to defend a business against criminal charges;
• Legal fees owed in connection to a lawsuit wherein a lawyer defends a person’s business against a claim; and/or
• Legal fees that an individual may owe to a lawyer for helping them to claim or obtain their tax refund from the IRS.

It is important to note, however, that not all legal fees that are tax deductible will qualify for a full tax deduction. In some instances, a business may only claim a portion of the legal expenses they paid on their taxes.

For example, if an individual files for bankruptcy due to being the owner of a failed business, they will only be permitted to deduct a portion of the legal fees on their taxes that were paid to a lawyer to represent them during the bankruptcy proceedings.

There are also some personal legal matters that may be eligible for a tax deduction if they can be deemed to be an income generating action. For instance, while attorneys’ fees paid for a legal separation or divorce will not be eligible for a tax reduction, the attorneys fees that need to be paid towards a legal action to collect back child support or spousal support, may potentially be tax deductible.

In addition, an individual may also be able to deduct the legal fees they paid to an attorney they hired for the purposes of doling out tax advice related to a divorce matter.

For example, if a person consulted a tax attorney regarding the taxes they may owe on the funds or assets they received in a divorce and it appears as a specific line item on their attorney’s billing statement, then the person will be able to deduct the amount they owe for that particular tax advice.

Again, the legal costs or attorneys’ fees associated with the divorce case itself, will not be eligible for a tax deduction. Thus, for tax purposes, it is extremely important that a person request that their attorney itemize all of their billing statements. This will help separate which legal fees are collected for specific purposes.

That way, if a person wants to claim a tax deduction for attorney’s fees associated with a personal legal matter, they will have no trouble separating which portions can legally be deducted and which parts of the bill cannot.

Do I Need to Contact a Tax Attorney?

Although the above article discusses some general rules regarding tax deductions and attorneys’ fees or legal fees, it is always best to consult a professional tax expert when it comes to tax issues, such as whether or not you may take a tax deduction. Thus, if you are unsure whether you may deduct legal fees and/or attorneys’ fees from your taxes, then it is strongly recommended that you hire a local tax attorney for further legal advice.

An experienced tax attorney in your area will be able to inform you as to whether or not you may be able to deduct attorneys’ or legal fees on your tax return. Your attorney can also explain why some legal or attorneys’ fees may not be eligible for a tax deduction. In addition, if there are other legal issues that concern your taxes, your attorney will be able to assist you with those matters as well.

Finally, if you need to appear before a judge because you took a tax deduction that was improper or unlawful, your attorney will also be able to provide legal representation in court on the matter.