Are Legal Costs Tax Deductible?
There may be times in both your personal and your business life when you must incur legal expenses. Legal expenses include attorney fees and court costs. While there are general rules to follow deducting legal expenses from your income tax, special circumstances may arise that make it prudent to see a qualified tax consultant for clarity and to be sure you don't take a tax deduction when you are not entitled to one, or that you miss deducting a qualifying legal expense.
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Personal Matters
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Generally speaking, legal expenses for personal matters are not tax deductible on your income tax return. One exception is in the case of collecting alimony. This is only true if the alimony is taxable alimony, as in some cases alimony is not taxable. Legal fees for divorce are not taxable. If an attorney does work for you in this regard, have him itemize his bill so that charges for work regarding collecting alimony, which is tax deductible, is shown separately from work on the divorce, which is not taxable. Record the tax deductible amount as a miscellaneous itemized deduction on Schedule A of form 1040. If you are the one paying alimony, you cannot take a tax deduction for any legal fees you incur.
Another tax deductible exception is when fees are charged by a tax attorney for preparing taxes.
Employment Related Matters
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Legal expenses when a lawsuit has been filed against you on a work-related matter qualify for a tax deduction. This may occur, for example, in the case of an unlawful discrimination claim against you, if you are an employer.
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Business Matters
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Any legal expenses required to operate your business are tax deductible. This includes drawing up contracts, setting up a business entity (such as forming a limited liability company or a corporation), pursuing legal action to attempt to collect money from delinquent accounts, registering a trade name, work by a tax attorney for income tax preparation and filing, and similar expenses. Legal fees to start a business or buy an existing business are also deductible.
Matters Regarding Income Producing Property
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As is true of operating any business, legal expenses paid to produce or collect income or to manage and maintain income producing property are fully deductible. Attorney fees to acquire a property may not be deductible, but they may reduce the taxable gain when the property is sold.
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