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.
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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.
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:
Additionally, the following legal fees, although not associated with your workplace, are also 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:
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 legal fees related to the determination, collection, or refund of taxes, you need to itemize your deductions rather than taking the Standard Deduction for the tax year.
However, beginning in 2018, the 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 In other words, some of the itemized deductions that you might have taken before 2018 are no longer applicable.
For example, in addition to tax-related legal fees, the following can generally no longer be included in miscellaneous deductions:
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.
Some states don’t follow the federal suspension of miscellaneous itemized deductions. As a result, you might be able to deduct legal fees related to the determination, collection, or refund of taxes on your state tax return.
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.
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 so that charges for deductible and nondeductible services are listed separately. 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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