Can You Claim Lawyer Fees on Your Taxes? Here’s What to Know
Understand when legal fees are tax-deductible, which expenses qualify, and how to properly report them to stay compliant with IRS rules.
Legal fees can be expensive, and many people wonder if they can deduct these costs on their taxes. While some legal expenses qualify for deductions, others do not. The IRS determines deductibility based on the nature of the expense.
Understanding which legal costs are deductible can help lower taxable income and prevent filing errors. Proper reporting and accurate recordkeeping are essential for compliance.
Eligible Expenses
Certain legal fees qualify for deductions if they directly relate to generating taxable income, running a business, or handling tax matters. Attorney fees for tax advice, IRS audits, or litigation involving taxable income may be deductible.
Business owners and self-employed individuals can deduct legal fees for contract drafting, intellectual property protection, and employment disputes as business expenses under Section 162 of the Internal Revenue Code. Costs related to defending a business in court or handling regulatory compliance may also qualify.
The Tax Cuts and Jobs Act of 2017 eliminated deductions for unreimbursed legal expenses related to workplace disputes for employees. However, self-employed individuals can still deduct legal fees tied to their business. Rental property owners can also deduct legal fees for evictions, lease agreements, or other property management issues on Schedule E.
Non-Qualifying Legal Costs
Personal legal matters such as divorce, child custody disputes, or estate planning for a personal will are not deductible. The IRS classifies these as personal expenses, even if they impact financial situations like alimony negotiations or property settlements.
Legal fees for purchasing a home or resolving personal property disputes are also non-deductible. Attorney fees for closing documents or title disputes are considered part of the property’s acquisition cost. Similarly, legal costs for criminal defense, even if related to one’s profession, cannot be deducted. The IRS does not allow deductions for expenses arising from personal misconduct or legal violations.
Lawsuits seeking damages for personal injury or defamation generally do not qualify unless directly tied to taxable income. For example, if suing for lost wages, a portion of attorney fees may be deductible. However, if the case involves only emotional distress without taxable compensation, the fees remain non-deductible. Legal costs for prenuptial agreements, family disputes, or inheritance claims also fall under personal expenses.
Reporting on Tax Forms
Deductible legal fees must be categorized correctly to comply with IRS rules. Business-related legal costs are reported on Schedule C (Form 1040) for sole proprietors or on the appropriate tax form for partnerships, S corporations, or C corporations. These expenses should be listed under “Legal and professional services” and must be directly connected to business operations. Misclassifying personal legal expenses as business deductions can lead to audits or penalties under Section 6662 of the Internal Revenue Code, which imposes a 20% penalty on underpayments due to negligence or substantial understatement of income tax.
For rental property owners, deductible legal fees should be reported on Schedule E (Form 1040) under expenses related to managing, maintaining, or protecting rental income. Incorrectly reporting these costs under personal deductions could result in disallowance and additional tax liability.
Legal expenses tied to litigation that results in taxable income may need to be reported differently. If attorney fees are associated with a settlement or award, they may need to be allocated against the taxable portion of the compensation, affecting the final tax calculation.
Recordkeeping Requirements
Thorough documentation of legal expenses is necessary to substantiate deductions in case of an IRS audit. Records should include invoices, retainer agreements, and proof of payment, such as canceled checks or bank statements, to verify both the nature of the legal service and its connection to deductible activities. The IRS requires expenses to be “ordinary and necessary” under Section 162(a) of the Internal Revenue Code, so documentation should demonstrate how the legal fees meet this standard.
Taxpayers should retain written correspondence with attorneys outlining the scope of work performed. This helps distinguish between deductible and non-deductible legal services, especially when a single legal engagement involves both personal and business matters. If an expense is partially deductible, itemized invoices detailing charges can help allocate costs correctly. Misallocating legal fees could lead to disallowed deductions and potential penalties under IRS accuracy-related provisions.