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.
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 now nondeductible.
The new legislation effectively reduced the amount 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 no longer allows you to deduct these fees. Other nondeductible 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
You can only deduct a handful of personal legal fees 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.
- Claims against the federal government for damage to property: If you are a deployed soldier and your home is damaged while you are gone, you can sue Uncle Sam for damages.
- 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 are 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 until it’s set to expire in 2025, business owners 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.