How to Deduct Attorney Fees on an Income Tax Return

by Beverly Bird

    Attorney fees fall into a gray area of tax law. Sometimes they're deductible, and sometimes they're not. Whether they're allowable – and where and how you deduct them – usually depend on why you retained the lawyer and what he did for you. Fees incurred for personal reasons are not typically deductible, unless they relate in some way to your income.

    What's Deductible

    At first glance, fees you pay to your divorce lawyer would not seem to be deductible, and for the most part they're not. If you're fighting over alimony, however, you can claim this portion of your fees because alimony is income to the spouse receiving it. If you consult with an attorney over the tax implications of your divorce settlement, this fee is also deductible. Fees associated with employment-related issues are usually deductible, because your employment results in income. If you hire an attorney to handle a tax problem, this too relates to your income, so you can claim these fees. If you're self-employed, you can claim any lawyer fees you incur in the course of running your business, as long as they're reasonable and necessary.

    Itemized Deductions

    If you're claiming personal attorney fees, such as for alimony or tax issues, you can't deduct all of them. The only way to claim such a deduction is by itemizing and foregoing the standard deduction for your filing status. Attorney fees fall into the category of "miscellaneous itemized deductions." This means the amount you can deduct must exceed 2 percent of your adjusted gross income. If your adjusted gross income is $90,000, and if your attorney fees amount to $15,000, you can deduct $13,200, or $15,000 less $1,800 – 2 percent of your AGI. Enter the deductible amount on Line 22 or 23 of Schedule A – the tax form for itemizing your deductions – depending on whether the work the lawyer did for you was tax-related. The total of all your itemized deductions, including your miscellaneous deductions, goes on Line 40 of Form 1040, and you must attach Schedule A to your return.

    Schedule C Deductions

    If you're self-employed, you don't have to itemize to claim attorney fees if they're a business expense. You escape the 2-percent rule, and you can also claim the standard deduction for your filing status. Claiming business expenses involves filing Schedule C, Profit or Loss from Business, with your return. Schedule C subtracts all your allowable business deductions from your income for the year, and the result is what you pay taxes on. Attorney fees are deducted on Line 17 of Schedule C. After you complete Schedule C, Line 31 tells you the amount of business income you must claim on your tax return, and this number goes on Line 12 of your Form 1040.

    Above-the-Line Deductions

    Legal fees associated with discrimination lawsuits are deductible above the line, on the first page of your 1040, to determine your adjusted gross income. However, a few limitations apply here as well. You must be the party who was discriminated against and your lawsuit must have resolved after October 22, 2004. You can't deduct more than the amount you recover in the lawsuit. This deduction goes on Line 36 of your 1040, and it includes court costs as well as attorney fees.

    Photo Credits

    • A businessman calculating expenses at tax time image by Christopher Meder from Fotolia.com

    About the Author

    Beverly Bird has been writing professionally since 1983. She is the author of several novels including the bestselling "Comes the Rain" and "With Every Breath." Bird also has extensive experience as a paralegal, primarily in the areas of divorce and family law, bankruptcy and estate law. She covers many legal topics in her articles.

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