Can you deduct the legal fees you pay your attorney on your federal income tax return? The answer to that question depends on several factors, including who you are and the reason why legal fees were incurred.
As a general rule, legal expenses incurred in business or business transactions are deductible. This includes legal fees paid in connection with prosecuting or defending litigation as well as legal fees paid for business or tax advice.
What about legal fees paid by individuals? Here is where it can get tricky. For individuals, legal fees can be deducted if they are paid or incurred for the production of income or for the management, conservation or maintenance of income producing property. Attorney’s fees incurred in connection with personal investments may also be deducted. The Internal Revenue Code also allows individual taxpayers to deduct expenses incurred in connection with the determination, collection or refund of any tax, and this includes attorney’s fees incurred in this process.
Individuals generally may not deduct attorney’s fees incurred in purely personal matters, such as preparing a will, handling personal litigation, property disputes, landlord/tenant matters, reviewing contracts, personal real estate transactions, etc.
It is important to note that most business related deductions for attorney’s fees are treated as general business deductions which are subtracted from gross income to arrive at adjusted gross income, so called “above the line” deductions. However, at the individual level, deductions for attorney’s fees are generally treated as miscellaneous itemized deductions which are subject to the 2% adjusted gross income floor on Schedule A.
— Kevin Palmer