What Makes Attorney Fees Tax-Deductible
When it comes to legal fees and taxes, the IRS says that they should be treated like any other business expense for a corporation. If legal fees are incurred as part of running your business, they are considered a legitimate expense and deductible from your taxes. If you are considering filing a lawsuit, the legal fees are considered ordinary and necessary, and therefore fully deductible.
If you are suing someone, the IRS says that those legal fees aren’t deductible if you are pursuing emotional distress because economic damages stemming from emotional distress are generally not deductible.
Other deductible legal fees and expenses, according to the IRS, are those incurred for the production or collection of income; acquiring or disposing of a capital asset; managing, conserving and maintaining property produced; obtaining tax advice; tax planning; filing a tax return; and contesting a tax return challenge.
The IRS also says that in most instances, attorney fees are deductible as unreimbursed employee expenses. The fees must result from services rendered in connection with business activities from which you derive income. Examples of deductible legal fees include fees you paid to obtain taxable damage awards for injury to your reputation or other non-physical injuries you may have received due to your employment, as well as legal fees connected with sex discrimination or age discrimination cases or wrongful termination suits.
A lawyer’s fee may be deductible if you were placed in a lower tax bracket after a divorce, but only the amount of the decrease in your tax on that portion of the award constituting income .
In a divorce case, the IRS says that generally, fees paid to your attorney to obtain alimony for yourself or to obtain taxable child support are not deductible from your taxable income and child support alimony is not taxable to the recipient. Legal fees paid to obtain child custody or to enforce child visitations are not deductible from your taxable income.
However, fees paid to enforce the terms of a post-nuptial agreement or for the division of marital or non-marital property, including household furnishings, real estate, bank accounts, pensions, retirement plans and business interests are deductible from your taxable income.
And, the IRS says that in general, legal fees paid to establish, enforce or challenge paternity, from which you will receive taxable alimony or receive a share in the support of children, are deductible.
If you are in an employment situation that requires you to retain legal counsel to negotiate a non-compete that your employer has given you, the advice given by the attorney is often tax deductible. Similar situations where attorney fees for a non-compete or severance negotiation are deductible are when you are moving to a new state, but the move has no direct ties to employment and you will receive no compensation for the move or relocation.
And while you cannot deduct attorney fees incurred to defend against an audit, you may be able to deduct the legal fees you paid to your attorney for the successful defense of the IRS audit.
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