Mass Black Judge

Attorney fees are an expense that often pop up, but where they stand on your taxes depends on whether they’re personal or associated with managing, conserving and maintaining income-generating property.

Legal expenses incurred to fight detrimental tenants typically qualify as tax deductible expenses for landlords; however, any personal legal costs related to defending against divorce litigation do not.

Small Claims Court

Contract negotiations, employee disputes and compliance expenses tend to qualify as tax deductions for small-business owners. Furthermore, damages suits filed to protect or settle property claims related to business investments may also qualify for deduction.

However, legal fees incurred to defend civil or criminal charges arising out of personal matters relating to discrimination claims or divorce proceedings are usually nondeductible expenses. Depending on their source, such expenses could either qualify as above-the-line deductions or miscellaneous itemized deductions limited by 2%-of-adjusted-gross-income threshold for regular tax filing and aren’t allowed at all for alternative minimum tax filings.

If your attorney’s invoice doesn’t clearly label which charges are tax deductible, it would be prudent to request they amend it so services deemed tax deductible appear separately from those which aren’t. That way, it will be easier for you to correctly substantiate them on your tax returns.

Personal Property Damage Lawsuits

Though no business welcomes litigation, knowing which legal expenses and awards are tax deductible can help companies more successfully deal with legal proceedings. For example, legal expenses related to personal injury claims that allege and prove some form of physical harm are deductible expenses.

Damages related to property law suits may also be tax deductible; for instance, legal expenses related to defending against or settling an eviction suit for rental property are considered tax deductible expenses.

However, there may be circumstances where legal fees of plaintiffs are not tax deductible. Most contingent fee cases require plaintiffs to recognize income equal to their gross recovery after attorney fees – typically around 40% – since attorneys typically receive 40% of any award they win as attorney fees are usually deducted before tax liability. Since 2004, rules surrounding when legal fees can be deducted have become increasingly complex; employment, whistleblower and civil rights cases still need creative approaches in order to successfully claim deductions.

Real Estate Lawsuits

Individuals seeking legal fee deductions should consult with a tax attorney regarding how best to take advantage of them for optimal tax savings.

Personal legal expenses might not qualify for deduction, while those related to business or investments might. Examples could include contract negotiations, legal advice, or defense against intellectual property claims.

The Tax Cuts and Jobs Act (“TCJA”) eliminated many miscellaneous itemized deductions, yet still allows individuals to deduct legal expenses necessary for income production. Such expenses might include legal expenses related to real estate law, zoning/permitting issues, employment law matters such as whistleblower cases or civil rights matters as well as patent or intellectual property litigation costs – although plaintiffs in contingent fee lawsuits must recognize gross income equal to 100% of recovery which seems unfair.

Employment Lawsuits

Legal fees can either be tax deductible or not depending on how a case is organized. Certain types of lawsuits present unique tax issues which must be carefully considered by both sides – for instance, the IRS considers attorneys’ fees paid in wage claims to be wages subject to employment taxes and can increase both sides’ costs accordingly.

An exception in the tax code allows an above-the-line deduction of legal fees associated with cases related to employment, civil rights or whistleblower claims. Unfortunately, even this seemingly straightforward deduction can be confusing for taxpayers, lawyers and certain tax return preparation software; because unless settlement agreements specifically allocate money for wages vs attorney’s fees separately, litigants will receive income from both sources simultaneously and must report it all as income when filing their taxes. It is therefore essential that attorneys’ invoices clearly list charges for both deductible and nondeductible services separately in order to help taxpayers and software with filing their returns accurately.