It’s my annual “Taxes from A to Z” series! Next up:
Let’s get this part out of the way right off the bat: nobody likes to pay lawyers. I get it. Not only am I a lawyer but I’ve hired my share of lawyers. But lawyers help solve problems and chances are, most people have a problem that needs solving from time to time.
Paying your lawyer for purely personal legal expenses is not deductible. So suing the guy that hit your car or paying a lawyer to get your kid out of jail for underage drinking is not going to result in a tax deduction.
However, some legal expenses are deductible. Generally, tax planning advice related to your income or income-producing property (including estate planning related to tax planning) and some tax controversy work would be deductible. This also extends to tax advice rendered in the course of planning for divorce or to collect alimony; divorce-related attorney fees are otherwise not deductible.
You can also deduct legal expenses that are related to either doing or keeping your job including fees paid to defend yourself against criminal charges arising out of your trade or business.
For those most part, you deduct legal expenses as part of a group of deductions called Job Expenses and Certain Miscellaneous Deductions on Schedule A at line 23. Since they’re on Schedule A, you have to itemize in order to claim the deductions.
Total expenses (not just legal fees) includes in this section are subject to the 2% floor. This means that they’re only deductible to extent they exceed 2% of your adjusted gross income (“AGI”), similar to the way that you figure the deductions for medical expenses.
Here’s a quick example: assume you have miscellaneous deductions that total $5,000 and AGI of $50,000. Further assume that you are itemizing your deductions. Your total deduction would be $4,000, or $5,000 (total expenses) less $1,000 ($50,000 x 2%).
You would claim the deduction on line 23 on Schedule A. The line item is labeled “Other expenses” so it’s easy to overlook. Other expenses would also include your accounting and investment fees – but not your tax prep fees (those go on line 22).
If you’re wondering about other business-related legal fees, they may also be deductible – just on other tax schedules (in most cases, those land on a Schedule C or C-EZ).