Are Bankruptcy Legal Fees Tax Deductible?
If you file for personal bankruptcy with the help of an attorney, the bankruptcy legal fees are not tax deductible, as the fees incurred are considered to be a personal expense. There are two instances in which legal fees are tax deductible: if you are utilizing a lawyer to produce or recover taxable income, such as with income-producing property; or if you pay a tax attorney to prepare your tax return or represent you during an IRS audit.
Other People Are Reading
-
Bankruptcy Estate
-
When you file for personal bankruptcy protection under Chapter 7, a bankruptcy estate is formed, which usually includes all non-exempt assets in which you have an ownership interest. Your bankruptcy estate is considered to be separate from you as a taxable entity. A court-appointed trustee, also called the debtor-in-possession, assumes the job of preparing and filing tax returns for the estate, as well as paying (out of the estate) any taxes owed. You are still responsible for filing your own personal tax return and paying any taxes due on income not belonging to the estate. Any legal fees incurred by you for proceeding with your bankruptcy case are not deductible, but legal fees paid for tax return preparation can be included as miscellaneous itemized tax deductions.
Administrative Expenses
-
Bankruptcy legal fees are tax deductible, by the trustee, as an administrative expense for the bankruptcy estate. According to the IRS, allowable administrative expenses include attorney fees and court costs. Administrative expenses are only deductible for the estate, but never for you. Legal fees charged to the bankruptcy estate are not subject to the usual two percent limit of adjusted gross income, as with most miscellaneous itemized deductions.
-
Tax Advice
-
You are still required to file a tax return, even if the tax-filing deadline is after your bankruptcy case has started. If you prepare your own tax return, but incur a consultation fee for seeking tax advice from a lawyer, the fee is deductible as a miscellaneous itemized tax deduction. Legal fees paid for tax advice regarding your bankruptcy and subsequent tax filing, would be deductible, since the advice qualifies as assistance in determining or collecting any refund of tax. You can also deduct legal fees for help with an IRS audit. The bottom line is, if the legal fees have anything to do with taxes, they are generally deductible.
Taking the Deduction
-
If you have paid legal fees for tax advice or preparation in relation to your bankruptcy, or have otherwise used an attorney's services for collection of taxable income, the deduction is usually reported on Schedule A of your Form 1040 tax return, as a miscellaneous itemized deduction. You can only claim the fees if you complete a return with itemized deductions. The legal fees would not be deductible if you take the standard deduction, rather than itemizing. Miscellaneous deductions are limited to two percent of your adjusted gross income, which can be found on line 38 of Form 1040.
-
References
- Photo Credit TAX TIME image by brelsbil from Fotolia.com
