There is no point in denying that legal services are not cheap. Fortunately, many types of legal fees (including most of the services provided by our firm) are tax deductible. In this blog post, we will review some of the basic rules for deducting your attorney fees.
The general rule is that attorney fees that you pay to help you produce or collect taxable income, or which are related to keeping your job (or doing it) qualify for a tax deduction:
Legal fees paid for tax advice are deductible
If you hire an attorney to provide you with tax advice, those fees are deductible. This includes any legal services that help you with your business or personal tax planning or controversy matters, including representation for a tax audit.
All types of business and personal tax advice qualify – income tax, property tax, sales and use tax, gift and estate tax, etc. Note, however, that while estate tax planning fees are deductible, legal fees for settling a will or for an estate dispute are not.
Legal fees required for making or collecting taxable income are deductible
If you pay legal fees to help you make money that you’ll need to pay taxes on, you can take a deduction. This includes attorney fees for:
- Business expenses, including the portion of drafting your estate plan as relates to your business
- Negotiating and drafting contracts for your business that relate to the delivery of your goods and services
- Collecting money that a customer owes you
- Defending a trademark, patent or copyright claim
- Social security appeals (to the extent that the benefits are taxable)
- The management or maintenance of real estate or other property you hold to produce income, including legal fees to assist evict a tenant (but not fees related to acquiring property, title issues or property disputes which become part of your home’s tax basis)
- A lawsuit for taxable alimony (but not fees for child support or custody battles)
- Criminal defense for charges related to your business or trade activities
IRS Publication 529, Miscellaneous Deductions, clearly states that a taxpayer may deduct any legal fees that are related to doing or keeping their job. This includes bringing or defending work-related claims, such as claims for unlawful discrimination. If you are involved in a class action suit against a current or former employer, your attorney fee portion of any settlement you receive is also deductible.
Note, however, the following restrictions:
- If another person or entity paid your legal fees for you, you cannot deduct them on your tax return.
- Most personal attorney fees are a miscellaneous itemized deduction and are limited to the extent they exceed 2% of your adjusted gross income (AGI). Two important exceptions are attorney fees relating to rental property which are deducted on Schedule E and discrimination lawsuit fees were are deducted from gross income on page 1 of your income tax return.
Aggressive tax preparation and legal services
The attorneys and CPAs at Moskowitz LLP have successfully prepared tens of thousands of income, corporate, partnership, trust and estate tax returns. We aggressively minimize our clients’ tax liability to the extent permitted under the law. Contact our San Francisco office today for a consultation.