Can I deduct attorney’s fees?

November, 04 2022 by Karen Thomas-Brandt, EA

There are many reasons one might incur attorney’s fees: divorce, discrimination claims, personal injury claims, child custody issues, whistleblower claims, and estate planning, just to name a few. One question we hear a lot is: Are attorney’s fees deductible on my tax return? The answer, like a lot of answers to tax questions is: Sometimes yes, sometimes no. Some questions we would need to ask are:

• Are the legal fees are related to your business? If so, then yes, they are deductible.
• Are the legal fees associated with a whistleblower claim or unlawful discrimination? If so, then yes, they are deductible.
• Are the legal fees associated with adoption? If so, then yes, they are deductible (just be sure to deduct them in the correct tax year).
• Are the legal fees for personal legal expenses, such as a personal injury lawsuit or child custody dispute? Even though these expenses can be enormous, they are, unfortunately, not deductible on your tax return.

Okay, now you know which legal fees are deductible, now you probably need to know where to deduct them on your tax return. Attorney’s fees associated with a business, farm, or rental property are deductible on their corresponding schedules (Schedule C, F, or E). Legal fees incurred as part of the adoption of a child are deductible on Form 8839. Starting in tax year 2021, the IRS made it a little easier to find the location on tax returns where you can deduct legal fees not associated with a business, rental property, or adoption (such as unlawful discrimination or whistleblower lawsuits): Line 24h of Schedule 1.

Let us look at some situations in which attorney’s fees are and are not deductible:

Example 1: Steve owns a rental house. After his last tenants moved out, Steve discovered several thousands of dollars in damages to the rental that would not be fully covered by the security deposit. To recoup the expenses, Steve hires an attorney to fight the destructive tenants for the repair costs. Steve can deduct these attorney’s fees on line 10 of his Schedule E, as they are directly related to his rental activity.

Example 2: Bob worked for Young Company for 30 years. Upon turning 60 years old, Bob was let go from Young Company due his “advanced seniority” at the company. Bob felt he was a victim of unlawful age discrimination and decided to hire an attorney to fight his case against Young Company. Bob can deduct these attorney’s fees (up to the gross income from the lawsuit) on his tax return on Line 24h of his Schedule 1 (for 2021), as they are due to unlawful discrimination.

Example 3: Jane and her ex-husband, Joe, divorced three years ago. At that time, alimony and child support were agreed upon. Things had been going well in terms of Joe paying Jane in full and on-time; however, lately Joe has been both slow and late in making his payments – even missing the last several months. Jane let it go at first but, when she brought it up with Joe, he put up a fight and argued that he has paid long enough (even though the terms of the agreement state he still has 5 years left on the child support and 10 years on alimony). Jane decided to hire an attorney to take Joe back to court to get the money she is due. Because these are non-deductible personal legal fees, Jane will not be able to deduct the attorney’s fees on her tax return.

Attorney’s fees can be costly and the deductibility of them can be a bit confusing. If you are deducting attorney’s fees on your tax return, consider getting an Audit Defense Membership. With a membership, TaxAudit's tax professionals will face the IRS and state taxing authorities on your behalf if you are audited.