If you are getting divorced, starting a new business, or suing someone, then you’re probably going to have to enlist the services of a lawyer. Will you be able to deduct any of the fees your attorney charges you?
In some cases, the answer is yes. Although there are still a few types of personal legal fees that are deductible, the vast majority of them currently are not—at least until the Tax Cuts and Jobs Act of 2017 (TCJA) expires in 2025.
- With a few exceptions, individual taxpayers may not deduct legal expenses on their tax returns.
- Exceptions include legal fees in connection with an employment discrimination lawsuit and any amounts earned in connection with whistleblower suits.
- Businesses may continue to deduct legal and professional fees if those fees were incurred in the course of conducting business.
Changes Under the 2017 Tax Cuts and Jobs Act
When Donald Trump took office in 2016, one of his first moves was to make sweeping changes to the tax laws that applied to the vast majority of taxpayers. One of these changes was to eliminate miscellaneous itemized deductions. Many taxpayers formerly claimed itemized deductions for unreimbursed employee expenses and various types of personal legal fees.
Eliminating most itemized deductions in 2017 precluded the possibility of deducting legal fees for any type for personal litigation. There are a few exceptions, but most legal fees that are incurred for personal reasons are no longer deductible.
The legislation effectively reduced the number of itemized deductions that many taxpayers previously enjoyed. It eliminated not only personal legal fees, but also unreimbursed employee expenses that exceeded 2% of the taxpayer’s adjusted gross income (AGI). Several other miscellaneous fees were also eliminated.
Most Personal Legal Fees Are Not Deductible
If you incur any type of legal expense for a personal reason, from getting divorced, to having a will prepared, to buying real estate, the TCJA of 2017 changed tax law so that you may not deduct these fees. Other formerly deductible expenses include anything related to child custody, personal injury lawsuits, changing your name, legal defense for civil or criminal cases, or a divorce settlement.
Personal Legal Fees You Can Deduct
While the TCJA took most miscellaneous deductions away, including most personal legal fees, it did leave taxpayers a handful of personal legal fee deductions under current tax law. They include:
- Legal fees in employment discrimination cases (where the you as the taxpayer are the plaintiff): The deduction is limited to the total amount of the your gross income.
- Whistleblower rewards: Say you report a person or business for tax fraud or evasion. If that person or business is caught, then you will be paid a percentage of the amount that was evaded. This deduction is limited to the amount that you are paid.
Many Business Legal Fees Are Deductible
The other side of the coin for taxpayers who are running or starting a business is that many business-related legal fees continue to be deductible on the Schedule C. If you are a businessperson, the legal fees you can deduct include those pertaining to:
- Collecting income from a customer (along with relevant court costs)
- A business declaring bankruptcy
- Handling and caring for income-producing equipment
- Any form of litigation that the business is involved in (and relevant attorney fees)
- Defending a taxpayer’s business or trade (but only as those fees that directly relate to the business—not to an individual, such as the owner or an employee)
- Drafting or negotiating contracts between you and your customers
- Defending any patent, trademark or copyright claims
Tax advice for your business is usually tax-deductible, unlike fees for personal tax guidance.
The Bottom Line
Taxpayers don’t have the leeway that they used to when it comes to deducting legal fees for personal reasons. Unless the TCJA is overturned, or if it is not renewed and expires in 2025, most individual taxpayers will be able to deduct only some of their legal fees for the foreseeable future. If you have incurred a legal expense and want to find out if it is deductible, visit the IRS website or talk to your tax or legal advisor.