Can I Write Off Legal Fees on My Taxes?

Deducting legal fees for tax purposes can be a complex area. While many legal expenses incurred for personal matters are generally not deductible, specific circumstances and types of legal actions do allow for deductions. The landscape of these deductions has been significantly shaped by recent tax legislation, particularly the Tax Cuts and Jobs Act (TCJA) of 2017, which introduced substantial changes to what was previously deductible.

General Deductibility Rules

Legal fees generally face a foundational principle: personal legal expenses are typically not deductible. A significant change impacting legal fee deductibility for individuals came with the Tax Cuts and Jobs Act (TCJA) of 2017. This legislation suspended miscellaneous itemized deductions, under Internal Revenue Code (IRC) Section 67, for tax years spanning 2018 through 2025. Historically, miscellaneous itemized deductions encompassed various expenses, including unreimbursed employee expenses, investment expenses, and certain legal fees. The deductibility of legal fees often hinges on the “origin of the claim,” meaning the underlying purpose for which the legal fees were incurred. This distinction helps determine whether an expense is considered personal or related to income-producing activities.

Business and Income-Related Legal Fees

Legal fees are generally deductible if they qualify as “ordinary and necessary” expenses directly related to carrying on a trade or business, under Internal Revenue Code (IRC) Section 162. Common examples of such deductible business legal fees include expenses for contract disputes, defending business lawsuits, protecting intellectual property, or collecting business debts. Fees for tax advice related to business operations are also typically deductible.

For sole proprietors and single-member LLCs, these business legal fees are usually reported on Schedule C (Form 1040), while legal fees related to rental real estate activities are reported on Schedule E (Form 1040). Corporations and partnerships typically report these expenses on their respective business tax forms, such as Form 1120 or Form 1065.

Legal fees incurred for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income, can also be deductible under IRC Section 212. Examples include legal fees associated with rental property management, such as eviction costs or lease disputes, or certain investment income matters. However, many legal fees related to investment expenses are now suspended for individuals through 2025 due to the TCJA.

A key distinction exists between current expenses and capital expenses. Legal fees that are current expenses are deductible in the year they are paid or incurred. Conversely, legal fees that are capital expenses are not immediately deductible but must be capitalized, added to the basis of an asset.

These capitalized costs can then be recovered over time through depreciation or upon the sale of the asset. Examples of capital expenses include legal fees to acquire property, perfect title to property, or for business startup costs like forming a company or drafting an operating agreement. For instance, legal fees for a first long-term lease are generally treated as capital expenses.

Specific Above-the-Line Deductions

Certain specific situations allow for legal fees to be deducted “above-the-line,” meaning they are adjustments to income on Form 1040 and do not require taxpayers to itemize deductions. These deductions reduce a taxpayer’s adjusted gross income (AGI).

Whistleblower Awards

One such deduction is for legal fees and court costs paid in connection with an award under whistleblower statutes, under Internal Revenue Code (IRC) Section 62. This includes awards from the IRS for information leading to the detection of tax law violations, or under the False Claims Act, and for certain SEC or Commodity Futures Trading Commission (CFTC) whistleblower programs. The deduction for these legal fees is limited to the amount of the whistleblower award that is included in the taxpayer’s gross income for that year.

Unlawful Discrimination Claims

Another above-the-line deduction is for legal fees and court costs paid in connection with certain unlawful discrimination claims, also under IRC Section 62. This applies to claims brought under various federal, state, or local laws that prohibit discrimination or regulate the employment relationship. The deduction is limited to the amount of the judgment or settlement from the discrimination claim that is included in the taxpayer’s gross income.

Wrongful Incarceration

Legal fees related to wrongful incarceration are deductible, also under IRC Section 62. This applies to legal fees and court costs paid in connection with a judgment or settlement from a civil action related to wrongful incarceration. These above-the-line deductions offer a direct reduction to taxable income.

Non-Deductible Legal Fees

Many types of legal fees are generally not deductible for individuals. Legal costs incurred for purely personal matters are typically disallowed. This includes fees for drafting wills or trusts, legal advice for personal vehicle purchases, child custody disputes, or general personal injury lawsuits. Legal fees related to divorce proceedings are also usually not deductible, with the exception of the portion specifically allocated to obtaining tax advice or collecting taxable alimony, though alimony itself is no longer taxable for agreements executed after 2018.

Legal fees incurred to acquire, defend, or perfect title to property are considered capital expenses and are not immediately deductible. Instead, these costs are added to the basis of the property, which can reduce any taxable gain when the property is eventually sold. Examples include legal fees for buying a home or defending ownership of land. This capitalization rule applies even if the property is used in a business or for income production, as the fees are part of the asset’s cost.

Legal fees incurred to produce or collect tax-exempt income are also generally not deductible. Furthermore, legal fees related to political activities or lobbying efforts are typically not deductible. This includes expenses for political campaigns or attempts to influence legislation, as they are not considered ordinary and necessary business expenses or related to income production.

Record Keeping and Reporting

Keeping records is important for substantiating any deductible legal fees. Taxpayers should keep itemized invoices from their attorneys that clearly detail the nature and purpose of the services rendered. These invoices should precisely delineate the specific legal actions and their connection to a deductible activity, such as a business operation, income production, or a qualified above-the-line claim. Proof of payment, like canceled checks or bank statements, is also necessary.

For situations involving mixed-use legal fees, such as a legal matter that has both personal and potentially deductible components, it is critical to obtain documentation that separates these charges. An attorney’s invoice should clearly differentiate between deductible and non-deductible services to ensure accurate reporting. Related correspondence or court documents that support the connection between the legal fees and the deductible activity further strengthen the taxpayer’s claim.

The method of reporting deductible legal fees varies depending on their nature. Legal fees classified as business expenses are typically reported on Schedule C (Form 1040, Profit or Loss from Business) for sole proprietors, or Schedule E (Form 1040, Supplemental Income and Loss) for rental or royalty income. For corporations or partnerships, these expenses are reported on their respective business tax forms, such as Form 1120 or Form 1065.

Legal fees qualifying for specific above-the-line deductions, such as those for whistleblower awards or unlawful discrimination claims, are reported directly on Form 1040 as an adjustment to income, often on Schedule 1. Consulting a qualified tax professional is advisable for specific circumstances and ensuring proper compliance.