Taxpayer asks:
As a newly minted lawyer that is now doing contract work, I was wondering if Bar exam prep classes are tax-deductible? Or any licensing fees, occupation state taxes, or expenses related to GETTING a law license are tax-deductible. There is a thread on JDU on this but no one seems to have a clear answer. Thanks!
Taxgirl says:
Ooh, as a newly minted lawyer, you’ll appreciate that my answer is yes – and no.
Easy one first: state and local taxes are deductible if you itemize your deductions. So, include any state occupational taxes on Schedule A.
Bar exam prep classes are not deductible to an individual taxpayer, nor are expenses relating to getting a law license. Some work-related education expenses can be deductible if they are required as a condition of continued employment (think CLEs, for example), but you cannot deduct work-related education expenses if they are needed to meet the minimum requirements to qualify you to work or if the expenses will lead to qualifying you in a new occupation. Bar prep fees are not deductible since they’re not required (!) as a condition of your employment. Bar application fees and the like don’t count since they are the minimum requirements to get you started in the profession – you can’t work as a lawyer without being admitted to the bar.
Dues for professional organizations, like bar associations, are deductible as miscellaneous expenses on Schedule A. Subscriptions to law journals and the like are similarly deductible.
Since a few folks raised the LLM as an issue on the thread that you linked to in your question, I’ll address that, too. The cost of an LLM is not automatically deductible: you must still meet certain criteria. For one, the LLM must be to maintain or improve skills required in your present work or it must be required by your employer or by law to keep your salary, status, or job. Even if you meet one of those criteria, you cannot deduct the expenses if the education is needed to meet the minimum educational requirements to qualify you in your trade or business (as with your JD), or is part of a program of study that will lead to qualifying you in a new trade or business.
As a tax lawyer, one of my first tax law jobs was contingent on my earning my LLM Taxation: that made my additional degree deductible.
(Editor’s note: see comments below.)
Similarly, if you decide to jump from one area of the law (say, trial work) to another (contract law, for example), you cannot deduct the cost of additional education to make that jump. Your additional educational expenses must be related to your present job in order to qualify, in most instances, as a work-related deduction.
(All of that said, the cost of an LLM may qualify for certain educational tax credits, like the Lifetime Learning Credit.)
So, some yes, some no. I hope that helps clear up the confusion!
Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.
TaxGirl,
I am surprised that state occupational taxes are deductible. I thought only real & personal property and state income taxes were deductible if Ad Valorem. Unless the election is made to deduct state sales tax instead of income. Any clarification?? Thanks, Clint
Yep, it’s specifically included as deductible as a Misc Expense under Schedule A. Check Pub 17, instructions for line 21. My explanation in the answer is kind of awkward, I guess, since it sounds like it would be a deduction lumped together with income tax. But it’s still deductible.
For deducting the LLM expenses, were you already practicing or did you go straight through for the LLM? Any hope for deducting LLM expenses if you went straight through?
Brad – I was practicing.
I don’t think it would qualify if you went straight through without being employed. You can’t deduct it if the intention is to *get* your first law job (that would be the same for your JD) and it must be required by law or your employer. It certainly isn’t required by law – and if you have no employer, then you’re out.
And while it’s true that you could have an offer of employment contingent upon your finishing your LLM before you actually start practicing, I still don’t think that would count. I think the LLM would still be considered as contributing to gainful employment in the first place, not a requirement of continued employment.
That’s what I was thinking, but got excited that someone deducted the LLM fees. Thanks!
I have clients that try to deduct their personal vacations – that doesn’t mean it’s okay! 😉
Glad I could help.
Thanks for the clarification! You rock!
Taxgirl,
I believe you are mistaken regarding the standard for deduction of LL.M. expenses. You stated that the “the LLM must serve to maintain or improve skills required in your present work and it must be required by your employer or by law to keep your salary, status, or job.” However, the standard laid out in Treas. Reg. 1.162-5(a) states that education expenses are deductible if the education “(1) Maintains or improves skills required by the individual in his employment or other trade or business, or
(2) Meets the express requirements of the individual’s employer, or the requirements of applicable law or regulations, imposed as a condition to the retention by the individual of an established employment relationship, status, or rate of compensation. ”
The point I am emphasizing is that the statute is disjunctive; if the LL.M. maintains or improves his skills, then the degree does not have to be required by the employer. According to my research, the key is that the student had practiced as an attorney for a period of time before getting the LL.M. So by going straight through from JD to LL.M., the expenses would not be deductible. But by practicing for some years, the expenses would be.
It is possible that I am mistaken, as you said your husband did NOT deduct LL.M. class expenses because he was not required to take them by his employer. Do you have citation for that?
I don’t mean to nit-pick, but I am a current LL.M. student who had practiced for a number of years and am planning on deducing the costs of the degree.
You’re right that I should have been more clear in my original answer and I’ll modify it above.
That said, I agree that if you’re currently practicing law, then the costs of obtaining your LLM are likely deductible but that’s not always a given. However, I think a strict reading of the Regs, and in keeping with the spirit of section 162 (of a deduction being “ordinary” and “necessary”) would make a distinction in some cases between merely improving skills and retraining. Switching to a different area of law, for example, to me, would not qualify as “maintaining or improving” skills in your current trade of business. I am a tax attorney. If I went back to school to get my LLM in Trial Advocacy because I decided that I wanted to be a trial attorney (shudder), I don’t think that fits the spirit of the law. I think that’s qualifying me for a new job, not improving skills in my current job. It’s like switching from cardiology to ENT: it’s not the same job.
There’s a great chart in Pub 17 that expresses this well: http://www.irs.gov/publications/p17/ch27.html#en_US_publink100034566
Also, assuming that you meet the threshold requirement for deducting the expenses incurred in obtaining the LL.M., wouldn’t it also be subject to the §67 2% floor?
Yep, as do all miscellaneous expenses on Schedule A.
Hi, I have a question that I think fits into this same vein, though it could also apply to ‘job search expenses.’ My wife is graduating from Medical school in May, so she’s spent lots of money on mandatory tests, residency applications, certifications, subscriptions and supplies to prepare for these tests, and then of course we spent plenty of money on travel, hotel, food, etc for going to her many residency interviews. While obviously residency will be her first job as a licensed physician, it certainly won’t be her first job in the general field of biology or science in preparation for becoming a doctor. How should we break everything up and what, if any, can we deduct, and how to we show that on the forms? Thanks!
How about patent exam review courses and expenses (for an attorney)? Does that count as a “bar review” course?
Also, I have all these random “year to date deductions” (including Bar expense offset, pretax dental plan, group term life offset, etc.,) on my W2 from my employer–any idea at all as to what do any of those mean (that is should I just ignore them or are they called “deductions” for any reason)?
Thanks.
I had to pay 10,000.00 to a lawyer to defend an action that was job related Iam a police officer who needed to file unfair labor act against Phila. are his fees deductable and if so what line and where on my forms.
Andy, assuming that your wife meets the criteria, she can likely deduct some of the interview-related expenses as job search expenses. See http://www.taxgirl.com/ask-the-taxgirl-job-search-expenses/
The tests would, I believe, be treated the same as in the legal world – not deductible. But then, I’ve never been to med school, so I’m assuming that the tests you’re speaking of are mandatory job requirements, like the bar exam.
L Sylvia –
I’m not 100% sure about the patent bar expenses but I would assume that it’s still an entry level exam? If so, not deductible.
Re the reimbursements, I’m working on a post about those.
Michael –
It’s hard to tell based on your summary but here is the general rule: legal fees are may be tax deductible if the dispute arose in the course of your business or employment (strictly personal legal fees are NOT deductible). If deductible, the legal fees would be considered miscellaneous itemized tax deductions and would be included on Schedule A.
Great info. on here. Thanks guys.
In line w/ the legal fees question, I am a recent law grad, just took the bar exam for the first time in Feb., 2009. I understand that BARBRI/PMBR prep course fees are NOT deductible and neither are the Bar Exam and Moral Character fees. Too bad, b/c all those fees/costs ran me about $6,000+!! Not to mention the hotel costs during the bar exam, which were also astronomically high (approx. $800). Recent law grads are swimming in sooo much debt these days, it’s getting a bit ridiculous, but there are just so many jobs out there for us, why should I be concerned…. lol
Anyway, on to my question and as it relates to legal fees. I had to retain an ethics lawyer in 2008 to advise me and represent me during the moral character application process w/ the Cal. Bar. Due to a few minor brushes w/ the law in my past (non-moral turp offenses, i.e.: DUI), I was instructed to retain an ethics attorney. I was told by multiple lawyers and law professors that this was in my best interest, otherwise my moral character application and Bar license could be substantially delayed, preventing me from being able to maintain my job at a corp. defense firm (I had an offer, which has since been rescinded due to a “hiring freeze”). This issue is certainly materially related to and w/i the scope of my employment, in fact, it is directly related to my employment and ability to practice my trade.
I was planning on deducting these fees, but I want to make sure I’m working w/i the confines of the law on this. Any advice would be appreciated. Thanks!
Not sure if anyone still monitors this old thread, but: what about bar renewal fees for those already employed as lawyers (and whose employment is contingent upon their remaining admitted in good standing)? For instance, my state requires us to shell out $350 ever other year to stay licensed; if I don’t, I’ll get fired from my job as a lawyer. Deductible? Thanks.
BT, deductible as a job-related expense on Schedule A.
Thanks so much for the prompt response.
But: only if my miscellaneous deductions exceed 2% of AGI, right? Since my $350 is my only job-related expense (and I have no other miscellaneous deductions), even with my meager government-lawyer AGI I won’t get a benefit from that. Do I have that right?
Thanks again; very useful web site.
What about bar application expenses, etc., for taking an exam in a second, third, or fourth state?
If your employer doesn’t pay for it, then it should be an unreimbursed employee expense on Schedule A.
Four bar apps? A wee bit ambitious, I see. 😉
I am a military spouse and move to a different state approximately every three years, so bar exams (and related expenses) every three years and fees to maintain an active license in prior states. What, if anything, is deductible for me?
Thanks!
After being a summer assoc., I was deferred by a firm (not likely to ever start there) and received a stipend in lump sum, plus bar prep and fee reimbursement for one state. I did not do any particular work for the stipend, but could not work for others so as not to create a conflict. Although a CPA, after evaluating several factors told me the firm should have paid me as an employee, the firm in fact paid me as an independent contractor, (exp reimb. not reported) so I have to report the income on Sched C. In this scenario, would bar fee and related expense (travel, other fees) for a Second State (unreimbursed) be deductible on Sched C? Is this where prof. memberships and the like should also be deducted, or must they still go on sched A?
Without more facts, I really can’t answer but… I don’t see how this qualifies as independent contractor work at all (not being able to work somewhere else is a key factor). I agree with your CPA. You might want to consider going back to firm and asking them to reconsider.
To the second part of your question, if you report the income on Schedule C, that’s also where you would report any allowable deductions. If you report as wages, deduct on Schedule A.
Kelly, thanks for your quick response. I agree with the CPA too, but the firm was firm, so to speak, and it was better to pay the additional tax than not receive the stipend. So I found myself in the “legal services” business. I was not a member of the bar in any state prior to December, when I was admitted on the same day to both states, but I was already a patent agent (not practicing). Payments from the firm were rec’d Sept. and Oct. and estimated tax payments were made for last 2 quarters, although Q3 was late since I didn’t realize this would be how the income was classified.
Since I can’t report as wages, I expected to put all expenses on Sched C, but do you think expenses related to 2nd state bar exam (fees, travel) qualify as business expenses in this case? Any other thoughts as to what does/does not qualify in this somewhat unusual case?
I am sorry I do not understand, since LLM tuition is qualified education expenses, are you saying is not deductible as a reducement of income (adjustment) for tuition and fees?
Hi, hope you still track this thread. My wife took and passed the bar last year and while her exam fees are not deductible. Can we deduct her fees for bar associations, etc. on our joint return although she has not started to practice because we have 2 young children? Didn’t know if she could still be consider self-employed despite not taking any clients.
I’m barred in Maryland but my employer (small firm) would like me to waive into the DC bar and also sit for the VA bar since the firm does a lot of business in the greater DC area. My employer is not willing to pay for me to do this, thus it would be on my own dime. Are the fees to waive into DC and sit for VA tax deductible? I think I might be able to get a small raise once I was barred in all 3 places, but don’t want to bank on it.
Taxgirl,
re: deductability of LL.M. expenses
You stated that the taxpayer must be practicing tax law prior to the commencement of the program in order to qualify for the deduction. I don’t think that’s right. Please see 30 T.C.M. 675, 680 and PLR 9112003. All that is required is that the taxpayer prior to entering into the LL.M. program, be engaged in a trade or business involving the general type of work (i.e., the practice of law). Thus, a practicing attorney at the time when he entered into a LL.M. program may deduct the related expenses if he returns to practicing law within a year.
I’m not sure that I understand your distinction.
I am currently working as a contact attorney for a friend’s firm. I will be doing all of my work from home. Can I deduct business related expenses (I.e. Costs of supplies, business cards, home office equipment, etc.)?
In addition, I’m getting my LLM while working as a contract attorney. Based on the chart in Publication 17, it looks like the costs are deductible as I’m “improving skills”. Would you agree? I’ve practiced for 6 years in my field.
i have been working as a lawyer in mass. and recently visited florida and took the bar review course, and successfully passed the bar exam. ive decided that i would like to open a second law office in florida and work from there 3 months out of the year, while my brother works in mass. am i able to deduct the cost of the florida bar review course as an education expense even though i am already established as a lawyer by passing the mass bar exam?
Taxgirl, I passed the July 2011 Florida bar exam. However, due to a DUI my admission is being delayed. Currently, I’m in a monitoring program that is required of me before I’m conditionally admitted. Part of my contract (yes, a contract) I have to pay $25/month to be monitored. When I’m admitted, the dues are $75/month. I’ve been paying the $25 month and already paid a $250 program registration fee. Are these payments tax deductible? Like I said, I have to pay this and if I don’t, its a breach of contract with the Florida Bar and grounds for denying my conditional admission.
I took the Barbri prep course before passing the bar exam in 2011. I work for an employer which did not require that that I pass the Bar but “encouraged” it. Is there any way I can claim the Barbri prep tuition as a Lifetime Learning Credit item in 2011?
I’m licensed in PA and DC but living in FL. Since I’m not working as an attorney yet in FL, but am licensed elsewhere, can I deduct my bar application, costs, tutor, etc. for taking the FL bar as a trade expense?
As a law student paying for the bar exam I was curious about this myself. My understaning regarding bar exam fees/travel to the exam was that it would be deductible but it must be amitorized over the course of your career at a lawyer. So, in other words, kinda pointless. Am I wrong about this?
Hi,
My husband is already an inactive member of anther state as an attorney. He could reactivate and practice there. Instead, he chose to practice in our own current state. The easiest way to do this was to retake the bar exam here. Can he write off these costs as start-up costs as he then opened his own law firm?
Thank you!