Can You Deduct Legal Fees on Your Taxes?

Navigating the tax implications of legal fees can be complex. The deductibility of legal expenses hinges on the specific nature and underlying purpose of the legal service. Some legal fees may offer tax benefits, while others provide none, making a clear understanding of the rules essential for taxpayers.

Legal Fees You Can Deduct

Legal fees are generally deductible if they are “ordinary and necessary” expenses directly related to a trade or business, the production or collection of income, or the management, conservation, or maintenance of property held for income production. For instance, legal costs incurred by a business to resolve contract disputes or defend against lawsuits tied to operations are typically deductible. These expenses might include attorney fees for drafting contracts, handling employment-related issues, or ensuring regulatory compliance.

Legal fees paid for tax advice or for the preparation of tax returns can be deductible, especially if they relate to business taxes or an individual’s tax liability. For example, fees for consulting with a tax attorney or defending a business during an IRS audit are usually deductible. Prior to 2019, legal fees incurred for the collection of taxable alimony were also deductible for the recipient, provided the attorney’s invoice clearly separated these charges.

Legal expenses tied to income-producing property, such as rental real estate, are another category of deductible fees. A landlord facing eviction proceedings or involved in a contractual dispute with a tenant, for example, could deduct these legal costs. Legal fees related to certain whistleblower awards, specifically those concerning federal tax violations or SEC regulations, are deductible as an “above-the-line” deduction, meaning they reduce your adjusted gross income. This deduction is limited to the amount of income received from the claim in the same tax year.

Legal Fees You Cannot Deduct

Many legal fees are generally not deductible, particularly those considered personal expenses. These include costs associated with divorce, child custody disputes, personal injury lawsuits, or drafting a will or trust. Even if such personal legal issues indirectly affect a taxpayer’s finances, they typically remain non-deductible. For instance, legal fees paid in connection with civil or criminal charges resulting from a personal relationship are not deductible.

Legal fees incurred to acquire or improve capital assets are generally not deductible as current expenses; instead, these costs are usually added to the asset’s basis. This means fees for purchasing a home, defending or perfecting title to property, or creating a family trust would typically increase the cost basis of the asset rather than being immediately expensed. Similarly, legal fees related to non-taxable income, such as certain personal injury awards, are not deductible if the award itself is not subject to tax.

The Tax Cuts and Jobs Act (TCJA) of 2017 suspended most miscellaneous itemized deductions subject to the 2% adjusted gross income (AGI) limit for tax years 2018 through 2025. This suspension includes previously deductible expenses such as unreimbursed employee expenses, investment expenses, and tax preparation fees for personal returns. Consequently, many legal fees that individuals might have deducted in the past, including those for non-business tax advice, are currently not deductible.

How to Claim Legal Fee Deductions

Accurately claiming deductible legal fees on a tax return requires understanding where each type of expense is reported. Legal fees directly related to a trade or business are typically reported on Schedule C (Form 1040) for sole proprietors and single-member LLCs. For partnerships and corporations, these expenses are reported on their respective business tax forms, such as Form 1065 or Form 1120. Legal fees associated with rental properties are generally reported on Schedule E (Form 1040).

While legal fees for tax advice were historically a miscellaneous itemized deduction, the suspension of these deductions from 2018 through 2025 by the TCJA means they are generally not deductible for individuals during this period. However, legal fees paid for tax advice specifically related to a business remain deductible on the appropriate business schedule. Legal fees for whistleblower awards are an “above-the-line” deduction, meaning they are reported on Schedule 1 (Form 1040) as an adjustment to income.

Good record-keeping is important when claiming legal fee deductions. Taxpayers should retain invoices from their attorneys that clearly detail the services rendered and their purpose. These invoices should ideally separate deductible from non-deductible services, especially in cases where legal work involves both business and personal matters. Keeping canceled checks, payment records, and any contracts related to the legal services further supports the claimed deductions. Such thorough documentation is important because legal fee deductions can sometimes draw scrutiny from the IRS, making clear, verifiable records highly beneficial.