In most situations, legal fees aren't deductible on your individual federal income tax return. However, there are a few important exceptions. Whether legal fees are deductible depends on why you paid them and whether they're connected to earning taxable income, running a business, or managing rental property.
Understanding the purpose of the expense is the key to determining how it should be treated on your tax return.
When Legal Fees May Be Deductible
Some legal expenses can provide a tax benefit when they're directly related to taxable income or certain activities specifically allowed under tax law.
Legal Fees Related to Taxable Income
You may be able to deduct legal fees if they were paid to produce, collect, or protect taxable income. Common examples include:
- Lawsuits involving unpaid wages
- Employment discrimination claims
- Wrongful termination cases
- Certain whistleblower award claims
These legal fees may qualify as an adjustment to income, sometimes called an "above-the-line" deduction, which can reduce your taxable income even if you don't itemize deductions.
Where to enter these expenses in the software:
- Federal
- Deductions
- Select My Forms
- Adjustments to Income
- Other Adjustments
Legal Fees for Business or Self-Employment
If you're self-employed or operate a business, legal fees are often deductible when they're considered ordinary and necessary business expenses.
Examples include:
- Contract review and preparation
- Business disputes and litigation
- Regulatory or compliance matters
- Collection of business debts
- Legal advice related to business operations
These expenses are generally fully deductible as business expenses.
Where to enter these expenses in the software:
- Federal
- Income
- Select My Forms
- Profit or Loss from Business
Legal Fees for Rental Properties
Legal fees connected to managing or protecting a rental property are generally deductible as rental expenses.
Examples include:
- Lease preparation and review
- Tenant disputes
- Eviction proceedings
- Collection of rental income
- Legal services related to operating the rental property
Where to enter these expenses in the software:
- Federal
- Income
- Select My Forms
- Profit or Loss from Rentals and Royalties
Legal Fees Related to Investments
Certain legal expenses incurred to protect or collect taxable investment income may be deductible when they're directly tied to income-producing activities.
Examples may include legal services related to:
- Taxable investment income
- Royalty income
- Income-producing property
The deductibility of investment-related legal expenses depends on the facts and circumstances of your situation.
Legal Fees for Tax Advice or Tax Matters
Legal fees paid for tax-related services may be deductible when they're connected to a business, rental activity, or other income-producing activity.
Examples include:
- Tax planning for a business
- Representation during a business-related IRS examination
- Advice regarding rental-property taxation
- Resolving tax disputes connected to income-producing activities
The proper treatment depends on the nature of the tax matter and where it's reported on your return.
When Legal Fees Are Not Deductible
Most personal legal expenses don't qualify for a tax deduction. Common non-deductible legal fees include:
- Divorce or separation proceedings
- Child custody or child support matters
- Estate planning for personal assets
- Personal injury lawsuits that don't involve taxable income
- Criminal defense expenses related to personal matters
- Purchasing a home for personal use
- Drafting a personal will
- General personal legal advice
These expenses are considered personal costs and can't be deducted on Form 1040.
Keep Good Records
If you're claiming deductible legal fees, keep documentation that clearly shows:
- The amount paid
- The date of payment
- The legal services provided
- How the expense relates to business, rental, or income-producing activities
Good records can help support your deduction if the IRS requests additional information.