In the Tax Cuts and Jobs Act it was made that the majority of legal fees will no longer be tax-deductible, however this rule does not include everything.
This guide will help you work out when your attorney or legal fees could be tax-deductible.
There is a good chance that at some point in your life you will need some level of legal advice.
People often assume that dealing with attorneys is a rarity, but it can come up much more often than many people would expect.
Dealing with things like writing leases for a house, any involvement with injuries, or even personal disputes like divorce.
You may not always need to talk to a lawyer but sometimes just getting legal advice could be recommended.
To get the help of an attorney, you will of course need to pay for the legal services the lawyer is providing.
And for the most part, getting the help of a lawyer is almost never cheap, which leads many people to wonder how much of their legal fees they could get deducted from your taxes.
In most cases this is not possible, however, if they are not legal fees, but business fees, there is a good chance that these fees could be deductible.
For all details surrounding legal fees and if they are tax-deductible, keep reading to find out what you want to know!
Personal Legal Fees Will Not Be Tax-Deductible
Previously, it was possible for some personal, or perhaps investment-related fees for attorneys and legal advice could be tax-deductible by being listed as a miscellaneous itemized deduction.
However, as mentioned in the introduction, following the Tax Cuts and Jobs Act which was put in place, between 2018 and 2025 these deductions would no longer be possible or permitted.
This means that any investment-related or any personal legal fees are not going to be deductible, at least until maybe 2025.
What Are The Personal Legal Fees You Will Not Be Able To Deduct?
Sometimes just saying personal legal fees is not specific enough, so the following examples are some of the most common examples of this which would not be tax-deductible.
- If you file and then win a personal injury lawsuit or a wrongful death action the legal fees will not be deductible, but the winnings will not be taxed.
- Any fees that are spent on tax planning for an estate, or settling a probate matter or will between family members will not be deductible.
- Any legal fees spent used to help close a purchase in buying a home or resolving any title issues and disputes, these fees will instead be added to the home’s tax basis.
- Money that is spent on legal fees used to get custody over children or used for settling child support payments.
- Attorney fees paid in getting a name change.
- Money spent on legal defense during a civil lawsuit or in a criminal case, an example of this being attorneys defending in a drunk driving charge.
- Any fees spent on lawsuits that are related to work as an employee or based on any work related matters.
- Fees spent on tax advice during a case like a divorce case or trying to get a spouse to pay alimony.
What Personal Legal Fees Can Be Deducted?
In spite of all of these exclusions, there are some fees that can be deducted, we will list some of the more notable examples of them here, so you know what they are.
- Money that is spent on attorney fees which is paid for employment related claims can be fully deducted. These mainly revolve around examples of unlawful discrimination that takes place within employment. This can include any discrimination that is proven to be on the basis of sex, race, religion, disability, or age. These fees will be deductible above the line and can be adjusted to income using a Form 1040. This means you will not have to itemize these personal deductions to get them claimed. You will not be able to deduct more than your gross income from this lawsuit, however.
- You will be able to deduct money spent on attorney fees if they are being used to sue the federal government when it comes to issues like personal property damages. This is possible for both civilians as well as federal employees. An example of this is a soldier suing if their property gets damaged while they are deployed. This deduction will be an adjustment to income like in the previous case.
- Finally, you can claim legal fees as deductible if the IRS grants a whistleblower award. This means when the IRS is told about someone who is cheating their taxes or committing similar crimes. The IRS will collect the money they are owed, and the whistleblower will be awarded a percentage. The deduction is limited by income as well as the amount you were awarded.
Business-Related Legal Fees Can Be Deducted
Generally speaking, legal fees that are gained from running a business can be deducted.
Deductible Cost From General Business Cases
If an attorney is hired to help with a business matter this cost can be deducted as a cost for a business operating expense, there are some exceptions, but here are some examples of cases you can deduct the costs for:
- Money spent collecting fees owed by a customer.
- Fees spent on defense when an employee files a work-related claim.
- Attorney fees on negotiating contracts with clients or customers.
- Money spent defending trademark, patent, or copyright claims.
- Legal fees for providing tax advice for the business.
- Money that is spent with legal advice starting up a business.
Deducting Legal Fees For Rental Activity
Any legal fees acquired from rental property activity, if it qualifies as a business activity can be deducted.
This does not include money that is spent getting a rental property. But it will be deductible if it is money spent doing something like evicting a tenant.
Most rental legal fees will count as business expenses, but this does not include everything so make sure to check your specific situation.
So these are most of the most common situations when attorney fees are either deductible and those which are not.