If you have sought legal help or are thinking of going to get legal advice, one of the questions that seems to be popular is whether expenses made for the legal advice are tax deductible. Perhaps you are considering divorcing your spouse or maybe you need help with a contract on a house you are interested in renting. There may be multiple reasons you may require the services of an attorney, but that fact stands that regardless of the reason, you are going you are going to have to pay for those services. Normally, the expenses incurred for legal advice or services are not tax deductible, but there are a few exceptions.
The General Guideline
The guideline to follow is straight enough; you can deduct your attorney’s fees you pay trying to collect or produce income that is taxable, or in connection with the collection or determination of a refund of any tax. Simply put, if the legal fees are connected in some form to taxable income or taxes, you are allowed to make a deduction. For example, you can make a deduction if you need the help of an attorney to procure money you have to pay taxes on or if an attorney helped you with a type of tax matter, like having legal representation when you are being audited by the IRS.
There are different types of situations that could qualify for a tax deduction, like fees you may pay for tax advice you may seek during a divorce case, like how the divorcing couple will split deductions for child care, home mortgage interest, or whether alimony is tax deductible by the paying spouse or taxable income to the spouse receiving the alimony. If you are trying to get your divorced spouse to pay alimony that is past due. If you are receiving a share of a class action settlement in a lawsuit that was filed against your former or current employer. For instance, say your former or current employer settles the class action lawsuit claiming that it didn’t pay overtime wages. As a part of the settlement you receive a check for $2000, but $2500 is reported to the IRS as taxable income because your share of the attorney’s amounted to $500. Since the income is considered work related, you are allowed to make a tax deduction for the $500 in attorney fees.
Typically, you are not allowed to deduct legal fees paid for advice personal matters or for things that do not produce any form of taxable income such as fees for settling a will or any kind of probate matter between family members, any kind of help in the closing of a purchase for a home, or the filing of a personal lawsuit, this is because any monetary award obtained from the lawsuit is not a part of your gross income making it non-taxable.
The Process and the Amount
Usually attorney’s fees can be deducted as itemized miscellaneous deductions on the form schedule A of the 1040 tax return. Miscellaneous deductions are often limited by what is known as the the two percent rule, which is that you can only deduct the amount of your miscellaneous deductions that’s more than two percent of your adjusted gross income, which is an amount you will list of your 1040 tax return, so it may be possible that you cannot deduct all of the fees you may want.
Are the Attorney’s Fees Business Related?
You are allowed to make deductions for the same things mentioned earlier as a business owner. If you hire an attorney and they help your business produce income or they prepare your taxes, then you can deduct those fees. You can also deduct fees paid for the negotiation or drafting of contracts that are for the sale of your services or items to your customers, filing a lawsuit to collect any money that a customer my owe you, also, you can typically deduct any attorney fee’s incurred in the purchase of an existing business or even starting your own. These business related expenses are usually deducted the same way other ordinary and necessary business expenses are, on schedule C on your 1040 tax return.
Finally, make sure to obtain the services of an experienced Certified Public Accountant (CPA) to help you in the process of determining if the attorneys fees you have paid are tax deductible.