Not all attorney fees are treated equal. If the matter involving attorney fees will produce further taxable income, then the fees are deductible. Otherwise, these fees are not deductible. Let's take a look at what may be deductible.
Fees associated with producing or collecting taxable income, or to determine, collect, or obtain a refund of any tax are deductible. If you need an attorney's help to make money that will be subject to tax or to represent you for an IRS audit then the fees are deductible.
Examples of Deductible Fees
Tax advice you may obtain during a divorce case may be deductible—for example, advice on how you and your ex-spouse will deduct home mortgage interest or child care, or whether alimony is tax deductible by the payor spouse or taxable income to the recipient spouse.
Fees associated with an estate planning.
Legal fees related to your job. For example, you can deduct attorney fees you pay to defend a lawsuit filed against you on a work-related matter, such as an unlawful discrimination claim filed by a former employee.
Attorney fees you pay to receive your share of a class action settlement in a lawsuit against your employer or former employer.
Attorney fees you incur in bringing a discrimination claim—for example, an age discrimination claim--are deductible.
Attorney fees incurred in a Social Security appeal are deductible to the extent that the benefits obtained are taxable—for example, if 50% of the benefits are taxable, 50% of your attorney fees are deductible.
Attorney fees incurred to evict a tenant from a rental property are deductible.
Examples of Nondeductible Fees
Fees for filing and winning a personal injury lawsuit — the proceeds are not subject to tax.
Fees for settling a will or probate matter between your family members.
Attorney fees associated with closing on the purchase of your home or with resolving title issues or disputes are added to the basis of your home rather than taken as a deduction in the year of purchase.
Fees for obtaining custody of a child or fees paid in connection to child support.
Fees paid for name changes.
Fees paid for legal defense in a civil lawsuit or criminal case that's not work-related—for example, attorney fees you pay to defend a drunk driving charge or against a neighbor's claim that your dog bit and injured her child.
How to Deduct Attorney Fees
Deductible fees as taken as an itemized, miscellaneous deduction on Schedule A of your Form 1040 tax return subject to limitations. These fees are deductible to the extent they exceed 2% of your adjusted gross income (AGI). For example, if your AGI is $100,000, the portion that exceeds $2,000 (.02X100,000) is taken as a deduction. Attorney fees relating to rental property are deducted on Schedule E and are not subject to limitations. Law suits involving discrimination claims are an adjustment to income taken directly on line 36 of Federal Form 1040 with the notation "UDC" on the dotted line.
Attorney Fees Related to Your Business
If you own a business and hire an attorney to help you with a business matter, the cost is typically deductible as a business, operating expense. The following fees are deductible.
Fees paid in connection to collecting money owed to you by a customer.
Fees pain in connection to defending you or an employee in a lawsuit over a work-related claim, such as a discrimination lawsuit filed by a former employee.
Fees paid for negotiating or drafting contracts for the sale of your goods or services to customers.
Fees paid for defending against a trademark, copyright, or patent claims.
Fees paid for tax advice for your business.
The deduction is taken directly as a business expense whether you file a Schedule C with Form 1040, or 1120, or 1120S.
Taxes are complicated and are rarely black and white. The discussed information is only the tip of the iceberg and ties into many other aspects of the tax code. If you would like to know more about this topic please give us a call at 208-935-1040. We would be happy to assist you. Check back very couple of weeks for articles on new topics. Or better yet, subscribe to our blogs.