Tax Deductibility of Legal Fees (sometimes)

What legal fees are tax deductible?

Most Likely Deductible:

1. Litigation related to doing or keeping your job.  (i.e. wrongful termination, wrongful discrimination, injury to reputation)
2. Cost of collecting taxable spousal support.
3. Portion of legal fees in divorce attributable to tax advice.  (Have your attorney itemize this.)
4. Estate planning fees related to income property or general tax planning.
5. Fees for recovering personal injury damages—if damages are taxable.

Probably NOT Deductible:

1. Costs related to divorce and child support cases, except portion attributable to collecting taxable spousal support.  (Have your attorney itemize this.)
2. Personal injury lawsuits unless taxable damages are recovered.
3. Will contests.
4. Title contests.  (However—add the legal costs to the tax basis of the property for when you sell the property later.)

The Bottom Line:

If it relates to collection or production of taxable income, it’s most likely deductible.  If it’s a business litigation expense it’s most likely deductible.  If it relates to tax advice or tax planning, it’s most likely deductible.  Your attorney should be able to itemize your bill upon your request.

The Bad News:

These expenses are miscellaneous expenses on IRS schedule A and are only going to help you if they are greater than 2% of your adjusted gross income (AGI).