If you needed legal assistance last year, you probably know how high legal costs can be. Although there is certainly no substitute for a properly trained and prepared lawyer in a legal situation, you may find that bills of attorney cause financial trouble. Can I deduct lawyer fees from taxes?
Are legal costs deductible?
Many people think that attorney fees related to personal injury cases are eligible for tax deduction. Unfortunately this is not the case. This is due to the fact that any financial compensation obtained through the courts would be considered as a recovery of the tax exemption, which in turn would not qualify for tax deduction.
However, if the legal costs are related to business issues and you are a self-employed or independent contractor, you will still be able to use Schedule C of the IRS form to apply for a deduction. In general, all expenses that could previously have been claimed as different deductions (exceeding two percent of adjusted gross income) have now been eliminated under the new tax law.
Personal legal fees
The general rule is that legal costs related to business operations are tax deductible. Legal fees related to personal matters are generally not deductible. There are some exceptions, including legal costs incurred for trading or doing business.
Legal fees for running a business
According to the IRS, legal fees incurred by a taxpayer in a transaction or business are generally deductible if they constitute ordinary and necessary business expenses.
What can be deducted
In general – there are exceptions – you can deduct legal fees for:
- Cases of discrimination or reporting of irregularities
- Performing or maintaining work, e.g. Defending against criminal charges arising out of work
- Getting tax advice
- Determining, contesting, paying or claiming any tax refund
- Situations in which you have been granted or have received a settlement for taxable damages
- Normal and necessary legal fees related to running a business
- Cases related to tax issues related to business, farm or income-providing real estate
- Obtaining maintenance payments
Also, if you qualify for a federal adoption tax credit, you may be able to write off legal fees associated with adopting the child.
What can’t be deducted
In most cases, personal legal costs cannot be deducted. For example, the IRS does not allow the deduction of legal costs related to:
- Situations in which you have been granted or have received a settlement for tax-free damages
- Preparation of a will
- Fees related to participation in a political campaign
- Fight for childcare
- Compensation for personal injury, except in the case of discrimination or investigation of irregularities
- Preparation or defense of real estate titles
- Acquisition of real estate, even if it is a rental property