Are Legal Fees Tax Deductible?
In general, legal fees for personal purposes are not tax deductible, but legal fees related to producing or collecting taxable income or for obtaining tax advice, and legal fees you incur in your business are tax deductible.
According to the IRS, legal fees related to producing or collecting taxable income or for getting tax advice are deductible as an itemized deduction on Schedule A to the extent they exceed 2% of your adjusted gross income. Some examples the IRS provides include legal fees to collect alimony, tax advice related to a divorce if the amount of the legal fees related to tax advice is separately identifiable, and legal fees to do or keep your job, such as to defend yourself against criminal charges related to your trade or business.
As indicated by Robert Wood in an article for Forbes, the legal fees you incur in a personal physical injury claim would not be deductible because the settlement you receive is not taxable income. But if you also receive punitive damages, which are taxable income, you could deduct the applicable portion of the legal fees as a miscellaneous itemized deduction.
If you incur legal fees and court costs in a case of unlawful discrimination, you may be able to claim the expenses as an adjustment to income instead of an itemized deduction. The amount you can claim as an adjustment to income cannot be more than the amount of the judgment or settlement you include as income on your tax return. This deduction would be claimed on line 36 of Form 1040, or line 35 of Form 1040NR. On the dotted line to the side you would enter "UDC" and the amount of your deduction.
Legal fees you incur in a rental activity, for example to collect rent or to evict a tenant, would be fully deductible as a rent expense on Schedule E. But the legal fees that are part of the closing costs for purchasing a property are added to the basis of the property and cannot be deducted as an expense. Also, legal fees for defending and perfecting title and settling zoning issues are added to the property's basis.
Legal fees paid in the normal course of your business are fully deductible as business expenses. If you are a sole proprietor you would deduct them on Schedule C. But legal fees for setting up your business, before you actually start operating the business, generally have to be capitalized. However, according to the IRS, starting in 2010, you can elect to deduct up to $10,000 in start-up costs. The $10,000 deduction is reduced by the amount your start-up costs exceed a total of $60,000. Any start-up costs that you cannot deduct must be amortized.
Sources:
1040 Instructions, IRS
Publication 525, Taxable and Nontaxable Income, IRS
Publication 529, Miscellaneous Deductions, IRS
Publication 535, Business Expenses, IRS
Robert Wood, The Only Good Legal Fees are Tax Deductible Legal Fees, Forbes
Schedule A, Itemized Deductions, IRS
According to the IRS, legal fees related to producing or collecting taxable income or for getting tax advice are deductible as an itemized deduction on Schedule A to the extent they exceed 2% of your adjusted gross income. Some examples the IRS provides include legal fees to collect alimony, tax advice related to a divorce if the amount of the legal fees related to tax advice is separately identifiable, and legal fees to do or keep your job, such as to defend yourself against criminal charges related to your trade or business.
As indicated by Robert Wood in an article for Forbes, the legal fees you incur in a personal physical injury claim would not be deductible because the settlement you receive is not taxable income. But if you also receive punitive damages, which are taxable income, you could deduct the applicable portion of the legal fees as a miscellaneous itemized deduction.
If you incur legal fees and court costs in a case of unlawful discrimination, you may be able to claim the expenses as an adjustment to income instead of an itemized deduction. The amount you can claim as an adjustment to income cannot be more than the amount of the judgment or settlement you include as income on your tax return. This deduction would be claimed on line 36 of Form 1040, or line 35 of Form 1040NR. On the dotted line to the side you would enter "UDC" and the amount of your deduction.
Legal fees you incur in a rental activity, for example to collect rent or to evict a tenant, would be fully deductible as a rent expense on Schedule E. But the legal fees that are part of the closing costs for purchasing a property are added to the basis of the property and cannot be deducted as an expense. Also, legal fees for defending and perfecting title and settling zoning issues are added to the property's basis.
Legal fees paid in the normal course of your business are fully deductible as business expenses. If you are a sole proprietor you would deduct them on Schedule C. But legal fees for setting up your business, before you actually start operating the business, generally have to be capitalized. However, according to the IRS, starting in 2010, you can elect to deduct up to $10,000 in start-up costs. The $10,000 deduction is reduced by the amount your start-up costs exceed a total of $60,000. Any start-up costs that you cannot deduct must be amortized.
Sources:
1040 Instructions, IRS
Publication 525, Taxable and Nontaxable Income, IRS
Publication 529, Miscellaneous Deductions, IRS
Publication 535, Business Expenses, IRS
Robert Wood, The Only Good Legal Fees are Tax Deductible Legal Fees, Forbes
Schedule A, Itemized Deductions, IRS
Published by Kevin Hagen
Born in Minnesota, USA in 1955; studied Business Administration - Accounting, graduating in 1977 and obtaining CPA license. Worked in corporate accounting environments, eventually becoming a technical trans... View profile
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