Can I Claim Legal Expenses on Taxes?
Some of the common causes for legal expenses, such as divorce and injury claims, could become a tax deduction, but determining eligibility is not always cut and dry. Even in cases where legal expenses are potentially tax deductible, they may not cost enough to count as a deduction. The general rule of thumb is any legal expenses related to taxable income are tax deductible.
Other People Are Reading
-
Identification
-
You can only deduct legal expenses if they are related to your taxable income or are a business expense, according to the Internal Revenue Service. For example, if you hire a lawyer to help collect alimony payments as part of a divorce, only the legal fees related to alimony would be deductible and only when the alimony is taxed. On the other hand, legal fees to defend yourself in a criminal case would not be deductible, because it involves no taxable income.
Other common legal expenses you can deduct are those for tax planning and to fight an unjust employment termination. (ref 2 and 3)
Two Percent Limit
-
As of 2010, IRS tax code requires legal expenses to be at least two percent of the payer's adjusted gross income to become tax deductible. Your adjusted gross income is net income after you take deductions. If you earned $100,000, for example, legal expenses would have to exceed $2,000 to become deductible. Take $50,000 in deductions and fees need only to exceed $1,000.
-
Business Expenses
-
Any legal fees related to business debt refinancing must be capitalized and then amortized. This means the legal fees are not considered an immediate expense -- usually a good thing because it makes the business appear to have more cash flow than it really does -- and are deducted over 60 months. You cannot deduct legal fees involved in purchasing an asset, but instead get to capitalize them. Business legal expenses are reported on Schedule C and not subject to the two percent AGI limit.
Tip
-
Unless your legal fees are related to a business, you will have to choose to itemize them on Schedule A of your 1040. If you are unsure as to whether you can deduct your legal fees, ask your lawyer before hiring him. After any case involving taxable income, you should request your lawyer draft a bill that lists which fees were related to taxable income. You cannot deduct any legal expenses if you receive reimbursement for them.
-
References
- Photo Credit A young woman holding a pen, doing her taxes image by Christopher Meder from Fotolia.com
