Is a Lawyer Fee Tax Deductible in the US? A Comprehensive Guide
The deductibility of attorneys fees on your taxes depends on the nature of the legal services and how they relate to your income or income-producing activity. This guide provides a general breakdown to help you understand when attorneys fees might be tax deductible.
Business-Related Legal Fees
If the attorneys fees are incurred for business purposes such as legal advice for your business, defending a lawsuit related to your business, or collecting business debts, they are usually deductible. These expenses are considered ordinary and necessary business expenses.
Employment-Related Issues
Legal fees related to doing or keeping your job may be deductible. For instance, if you hire an attorney for a case involving unlawful termination or discrimination in the workplace, those expenses could potentially be deducted.
Tax-Related Legal Fees
If you incur legal fees for tax advice or for assistance in a tax audit, these fees are generally deductible. This is because they are directly related to ascertaining, collecting, or obtaining a refund of any tax.
Investment or Income-Producing Legal Fees
Legal fees paid for matters that help produce or collect taxable income or to manage, conserve, or maintain property held for producing income may be deductible. This could include legal expenses for rental property disputes or estate income collection.
Personal Legal Expenses
Generally, legal fees that are personal in nature are not deductible. This includes fees for things like drafting a will, handling a divorce, or other personal lawsuits.
Specific Exceptions and Limitations
There are specific exceptions and limitations based on the tax laws and regulations in your jurisdiction. For example, certain legal fees in discrimination suits or whistleblower awards may be deductible above-the-line, meaning they can be deducted without itemizing.
Itemized Deductions and AGI Thresholds
For some of the deductible fees, you might need to itemize your deductions on your tax return. Only amounts exceeding a certain percentage of your adjusted gross income (AGI) may be deductible.
Recent Tax Law Changes
Be aware that tax laws change frequently. For instance, the Tax Cuts and Jobs Act (TCJA) of 2017 made significant changes to itemized deductions, affecting the deductibility of some legal fees.
Given the complexity and the potential for tax laws to change, it's advisable to consult with a tax professional or accountant for specific advice regarding your situation. They can provide the most current information and help you understand how the tax laws apply to your legal expenses.
Key Points to Remember:
Business-related legal fees: Ordinary and necessary business expenses. Employment-related legal fees: Potentially deductible for unlawful termination or discrimination cases. Tax-related legal fees: Generally deductible as related to tax audits or advice. Personal legal fees: Not deductible for non-business purposes. Specific exceptions: Discrimination suits or whistleblower awards may be above-the-line deductions. TCJA 2017: Significant changes to itemized deductions affecting legal fees.For more detailed guidance, consult with a tax professional or accountant. They will ensure you stay compliant with the latest tax laws and regulations.