With recent changes to the tax laws and adjustments to what counts as being deductible or not, you might be wondering if you're able to deduct any of your legal fees. Follow our guide to determine which legal fees can and cannot be deducted on your taxes.
• You can deduct legal fees that are ordinary and necessary expenses directly related to the operation of your business as a business expense.
• Legal fees you incur for resolving tax issues, advice or preparation of tax forms related to your business usually are deductible.
• Fees related to adopting a child are deductible if you qualify for the federal adoption tax credit.
• Legal fees related to personal issues typically can't be included in your itemized deductions.
Deductions for legal fees
Every year when you get ready to file your taxes, you should take stock of what deductions and tax credits you qualify for. On the list for you to consider are any legal fees you might’ve incurred.
Legal fees that are deductible
In general, legal fees that are related to your business, including rental properties, can be deductions. This is true even if you didn't win the legal case in which the legal fees were incurred.
For instance, according to the IRS, you can deduct:
- Fees that are ordinary and necessary expenses directly related to operating your business (should be entered on Form 1040, Schedule C).
- Fees for resolving tax issues, advice or preparation of tax forms related to your business (should be included on Form 1040, Schedule C).
- Fees for rentals or royalties on properties for which you earn income (should be included on Form 1040, Schedule E)
- Fees related to farm income and expenses (should be included on Form 1040, Schedule F).
- Fees related to whistleblower claims (should be included on Form 1040).
- Fees related to unlawful discrimination claims (should be included on Form 1040).
Additionally, the following legal fees, although not associated with your workplace, are also deductible:
- Fees related to adopting a child if you qualify for the federal adoption tax credit (should be included on Form 8839).
Legal fees that are NOT deductible
Any legal fees that are related to personal issues can't be included in your itemized deductions. According to the IRS, these fees include:
- Fees related to nonbusiness tax issues or tax advice.
- Fees that you pay in connection with the determination, collection or refund of any taxes.
- Personal legal expenses, including:
- Child custody
- Purchasing real estate
- Breach of promise to marry
- Civil or criminal charges related to personal relationships
- Personal injury
- Title preparation
- Estate planning such as will preparation
- Property claims or settlements
- Fees for defending civil or criminal charges that arise from your participation in a political campaign
While not every kind of legal fee can be deducted, those that can be will need to be itemized.
TurboTax Tip: Make sure your attorney's invoices clearly identify the nature of the services provided. Ask for any bills that list charges for both deductible and nondeductible services to be separated.
What does it mean to itemize your deductions?
When filing your taxes, you can usually either choose to take the standard deduction or to itemize deductions. Both of these options will typically reduce your taxable income, which means that you'll pay less in taxes. In the case of deducting your legal fees, you need to itemize your deductions rather than taking the standard deduction for the tax year
Beginning in 2018, the new tax law limits the types of itemized deductions a taxpayer can claim while at the same time raising the standard deduction. In other words, some of the itemized deductions that you might have taken in previous years are no longer applicable.
For example, the following can generally no longer be included in miscellaneous deductions:
- union dues
- work clothes
- hobby expenses
- tax preparation fees
- investment expenses
The 2% rule
When itemizing taxes before 2018, you may remember hearing about the "2% rule." This rule meant that taxpayers who couldn't write off certain expenses related to their jobs were allowed to deduct a portion of those itemized miscellaneous expenses that exceeded 2% of their Adjusted Gross Income (AGI).
As of 2018, deductions related to this 2% rule have been suspended. However, some legal fees can still be deducted if they relate to your work.
Awards from legal settlements and cases
If you were awarded money from a legal settlement or case, it's likely that the award amount will be taxable and should be included in your gross income reported to the IRS. Generally, the only exception is if the money was awarded to you as a result of a lawsuit for physical injury or sickness. But even then, there are other rules and exemptions that may apply, as outlined by the IRS. In most instances, the attorney fees from these cases can't be deducted from your taxes.
Record-keeping tips to make taxes easier
Make sure your attorney's invoices clearly identify the nature of the services provided. If the invoice your attorney provides to you doesn't specify the type of legal advice or counsel, ask the attorney to amend it to include all of the necessary information. That way, you're able to accurately substantiate legal fees that you deduct on your taxes. You can also make the process a lot easier if you ask for any bills that list charges for both deductible and nondeductible services to be separated.
It can be difficult to keep track of the deductions that you qualify for — especially if there are rules like those regarding legal fees. TurboTax will find every deduction and credit you qualify for by asking you simple questions to help you get the biggest tax refund.
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