Visiting the lawyer has a negative stigma in the American culture, but many trips are simply for legal advice. If you find yourself paying attorney fees, keep in mind that some of those fees could be beneficial during tax time. As a CPA, I see a lot of clients who miss tax deductions arising from their legal expenses. The problem is that only certain types of legal expenses are tax deductible. Below is a list of various types of legal fees and their deductibility:
Legal fees related to getting or keeping a job, or related to a severance agreement are all deductible.
Tax Advice & Planning
Legal fees for tax advice are deductible, and any tax qualifies: income, estate, gift, property, excise or sales and use tax. The fees may involve tax planning or controversies, and even fees for purely personal tax advice qualify
Business related, or related to income property (like rentals)
Legal fees paid for the production or collection of income, or related to the management, conservation, or maintenance of property held for the production of income are deductible.
Legal fees for divorce, per se are not deductible. However, fees related to tax planning in divorce, such as how the client and their ex-spouse will take deductions for home mortgage interest or child care, or whether alimony is tax deductible by the payor spouse or taxable income to the recipient spouse or trying to get past due alimony are all deductible.
There are some types of legal fees that aren?t deductible:
They include personal injury cases, settling a will or probate, in connection with the purchase of assets such as a house, or defending against a civil lawsuit or criminal case. Also, and very importantly, drafting legal documents is not a tax deductible expense
Most law professionals have the ability to separate the deductible legal fees from those which aren?t deductible, so be sure to ask them to do so at the time of billing. It will save everyone time and confusion during tax season. As always, feel free to give us a call to discuss this matter further @ (763)786-7899.
Sean P. Riley, CPA
Hubmer, Enstad, Ovik & Co., Ltd.