There are plenty of lawyer jokes out there, but legal bills aren’t so funny. The good news is that, in a few situations, these fees can be tax-deductible. Here are some ways attorney fees and other legal expenses can cut your tax bill.
In general — there are exceptions — you can deduct legal fees for:
- Discrimination or whistleblower lawsuits
- Doing or keeping your job, such as defending yourself against criminal charges arising at work
- Getting tax advice
- Determining, contesting, paying or claiming a refund of any tax
- Situations in which you were awarded or got a settlement for taxable damages
- Ordinary and necessary legal fees related to operating your business
- Cases involving tax issues related to your business, farm or income-producing rental properties
- Obtaining alimony payments
Also, if you qualify for the federal adoption tax credit, you might be able to write off legal fees associated with adopting a child.
What’s not deductible
For the most part, personal legal expenses aren’t deductible. For example, the IRS doesn’t allow deductions for legal expenses associated with:
- Situations in which you were awarded or got a settlement for tax-free damages
- Preparing a will
- Charges related to participating in a political campaign
- Fighting for custody of a child
- Damages for personal injury, unless they’re discrimination or whistleblower suits
- Preparing or defending titles on a property
- Acquiring property, even if it’s a rental property
How to get the most out of this deduction
Know about the 2% rule: In general, individuals can deduct only the portion of qualified legal expenses that exceeds 2% of their adjusted gross income, though there are exceptions. So if your AGI is $100,000, you likely can’t deduct the first $2,000 of your qualified legal expenses. This rule significantly limits the size of the deduction for many people, but if you’ve run up a huge tab with your lawyer, this could still shrink your tax bill at least a little.
Prepare to itemize: To deduct legal fees, you’ll need to itemize your taxes instead of taking the standard deduction. This means using Schedule A. It’ll probably take more time to do your taxes if you itemize, but you could end up with a lower tax bill. (Get help deciding whether to itemize.) If the legal fees are a business expense, you’ll probably need to use Schedule C; if they’re related to rental property, look at Schedule E.
In general, individuals can deduct only the portion of qualified legal expenses that exceeds 2% of their adjusted gross income.
Make sure your attorney itemizes the bill: Some of your lawyer’s time might be about tax stuff; some of it won’t. In turn, some of the cost might be deductible and some of it won’t. To figure out what’s what, you’ll need itemized bills from your attorney. “Some attorneys will make an estimate and say, ‘Well, hey, 25% of the case involved your alimony claims. You gave me $100,000, therefore it’s $25,000.’ I would be cautious about that approach because the IRS may say that isn’t a real record of expense, it’s just a guess,” warns attorney Christopher Melcher, a partner at Walzer Melcher LLP in Woodland Hills, California.
Think strategically: If you know a soon-to-be ex is going to deduct the legal bills attributable to getting alimony from you, factor that into your divorce negotiations, Melcher says. “Basically, there’s more income now or more cash to divide, because we found some tax savings there,” he explains.
See a pro: The deduction for legal expenses is one of the grayer areas of the tax code. So if you have a lot of legal fees that you want to deduct, run it by a qualified tax professional first. After all, the last thing you want is another legal bill.