Are legal fees deductible?

[MargaretL]

It depends on the nature of the fees, as only fees in regards to taxable income or tax are deductible.

Legal Fees you can deduct:

• Court costs and attorney fees related to either doing or keeping your job, including back pay, injury to reputation, and unlawful discrimination claims
• Costs of collecting taxable alimony or arranging details of alimony payments
• Fees for tax advice related to a divorce, if the bill specifies how much is for tax advice. You cannot deduct any other legal fees related to a divorce or child support since they are personal expenses not related to taxable income.
• Fees for personal injury actions where you recover taxable damages
• Estate tax planning fees related to tax planning or income-producing property
• Costs of collecting taxable Social Security benefits
•  Fees to recover income-producing property such as stocks or bonds loaned as collateral

Legal fees you cannot deduct:

• Expenses for personal lawsuits unless you recover taxable damages
• Legal fees for personal injury awards that are tax-free
• Legal costs related to the acquisition or determination of title to property. However, you may add these costs to the basis of the property, which becomes important when you sell the property, or if you depreciate it.
• The costs of contesting a will. This is because an inheritance is not taxable income.
• Legal fees for divorce or child support actions, other than those stated above as eligible.

Data entry in TurboTax to deduct legal fees:

1. Federal Taxes
2. Deductions and Credits
3. Scroll down to Other Deductions and Credits
4. Select Legal Fees

[Dsp1014]

Under the legal fee section it says that job related legal expenses are deductible, but it doesn’t have an option to make it deductible.  The whole section says legal fees are not tax deductible this year.  

[xmasbaby0]

No, your legal fees are not deductible.  The tax laws changed for 2018 and beyond.

https://ttlc.intuit.com/questions/4482873-which-federal-tax-deductions-have-been-suspended-by-tax-re...

[bthibod]

I have legal fees for setting up Special Needs Trust which manages income producing property. I have no way to indicate the legal fees should be deductible on my return.  How do I do that?

Thanks!

[Kojo]

Can attorney fees and court cost  for settling an estate be calmed  

[Kojo]

This is definitely my last buying this program  all I can say is you got me this year  

[DianeW777]

Yes, if the reason for the fees is because it is being held in the estate or trust. See this excerpt from the Form 1041 instructions for line 15a, Other Deductions.

• Other costs paid or incurred by estates and non-grantor trusts.

   

  Under section 67(e), deductions are allowable for costs which are paid or incurred by an estate or non-grantor trust in connection with the administration of the estate or trust and would not have been incurred if the property were not held in such trust or estate.

  • In determining whether a cost is deductible by an estate or non-grantor trust it must be determined whether the cost would be “commonly or customarily” incurred by a hypothetical individual owning the same property. If the cost would be deductible by a hypothetical individual, it is not deductible by the estate or non-grantor trust.

    It is the type of product or service rendered to the estate or non-grantor trust in exchange for the cost, rather than the description of the cost of that product or service that is determinative.

    Costs that are incurred commonly or customarily by individuals include costs incurred in defense of a claim against the estate, the decedent, or the non-grantor trust that are unrelated to the existence, validity, or administration of the estate or trust. These amounts are not allowable deductions.

[natashalust]

The Pub 529 rev Dec 2020 says 

• Legal fees related to producing or collecting taxable income or getting tax advice.

• So there should be a line 

[ReneeM7122]

Yes, legal fees can be deductible on your tax return, depending on what they are related to.

Here is a TurboTax article about legal fees and tax deductions.

@natashalust

[spichon]

Hello MargaretL,

I paid an attorney to recover a lost 401K account denied by my former employer.  I enter the legal fees in Turbo (Federal Deductions and Credits) and was told that legal fees are not deductible on the federal return but might be on the State return and that I will be asked the specifics when I enter my State information. I'm done with the State however Turbo never pursued the fees any further.  Is there a way to make Turbo pursue the issue on the State level?

Thank You,

~S

[MarilynG1]

Most attorney fees are not deductible, except for business purposes, since the tax law changes of 2017. 

Did you receive a 1099-Misc to report taxable income on your return as a result of your lawsuit? 

If so, click this link for more info on How to Enter a Legal Settlement. 

Attorney fees are usually already subtracted from the settlement amount you received on a 1099-Misc. 

What state are you in?  Most states follow Federal guidelines. 

Some legal fees can be deducted if you Itemize Deductions on your Federal return. 

This link has detailed info on Deductible Legal Fees. 

[spichon]

 Hi MarilynG1,

Thanks for the quick response.  I'm trying to recover my 401K from my former employer which is denying my eligibility.  I live in California and we're just ready to go to court so there is no settlement yet and no 1099-MISC.  My problem is that Turbo although promised to get more specific later for State deduction never did ignoring earlier notice it provided.

Thanks again,

~S

[MarilynG1]

That probably means that if you were able to deduct Attorney Fees in your Federal return (as an Itemized Deduction on Schedule A), that info would flow over into your California return.

I am personally not familiar with California law on this, as to whether they have an exception to the Federal law (which generally doesn't allow a deduction).

 Click this link for info on How to Contact your State Dept of Revenue.