This content has been reviewed and edited by an Investment Advisor Representative working for Global Predictions, an SEC-registered Investment Advisor.

Have you ever looked at a hefty legal bill and thought, "Can I get some relief during tax season?" Legal fees can be a big expense, and figuring out whether they’re tax deductible can feel overwhelming. But don’t worry—We're here to walk you through it. Let’s break it down in simple terms so you can figure out what applies to your situation and, hopefully, make those bills a little less painful.

Key Takeaways

• Legal fees might be tax deductible, but it all depends on the type of case and how the fees are classified.
• Business-related legal fees are usually deductible, while personal legal fees generally are not.
• Tax-deductible legal fees include those related to tax advice, earning taxable income, or managing investments.
• The Tax Cuts and Jobs Act of 2017 (TCJA) eliminated many deductions for personal legal expenses through 2025.
• Keeping detailed records and consulting with a tax professional can make a big difference.
• Strategies like grouping expenses in a single tax year can help you maximize deductions.
• Changes after 2025 may bring back some deductions for personal legal fees, so staying updated is key.

The Basics: When Are Legal Fees Deductible?

Legal fees can only be deducted if they’re considered ordinary and necessary expenses tied to your business, income, or tax preparation. Let’s go through the main categories:

1. Business Legal Fees

If the legal expenses are connected to running your business, they’re generally fully deductible. These might include:

• Drafting or reviewing contracts.
• Defending your business in lawsuits.
• Handling employee disputes or labor law issues.
• Protecting intellectual property, like trademarks or patents.

Hypothetical Example: Let’s say you own a small bakery and hire a lawyer to handle a contract dispute with a vendor. Those legal fees are deductible as a business expense.

2. Investment-Related Legal Fees

Legal fees that help you earn taxable income or manage investments can also be deductible. For example:

• Attorney fees for disputes over rental property income.
• Legal costs for reviewing investment contracts.

Hypothetical Example: If you hire an attorney to settle a dispute about rental income, those fees may be deductible because they directly relate to earning taxable income.

3. Tax-Related Legal Fees

Legal fees for tax advice or representation in an IRS audit are deductible as “tax preparation” expenses.

Hypothetical Example: If you hire a tax attorney to negotiate with the IRS over a tax debt, those fees qualify as deductible.

When Legal Fees Are Not Deductible

Not all legal fees qualify for deductions, especially if they’re personal. Here are common examples of non-deductible fees:

• Divorce proceedings, even when financial issues are involved.
• Personal injury lawsuits, unless they’re tied to your business.
• Criminal defense fees, unless related to your business activities.
• Estate planning fees for personal reasons (e.g., drafting a will).

Hypothetical Scenario: Karen spends $10,000 on a divorce lawyer to settle alimony payments. These fees aren’t deductible because they’re considered personal expenses.

Changes Under the Tax Cuts and Jobs Act (TCJA)

The TCJA, implemented in 2017, made significant changes to the deductibility of personal legal fees. Before 2018, certain personal legal expenses were deductible as miscellaneous itemized deductions. Now, those deductions are eliminated through 2025. Here’s what to know:

• Still Deductible: Legal fees tied to business, investments, or specific cases like whistleblower claims or discrimination lawsuits.
• What’s Not: Most personal legal fees, such as those for divorce or estate planning.

What Could Change After 2025? If the TCJA sunsets as planned, some personal legal fee deductions might return. For instance, deductions for tax advice or whistleblower claims could become more broadly applicable. Keep an eye on these changes to adjust your tax planning accordingly.

How to Claim Legal Fee Deductions

1. Classify the Expense: Figure out if the legal fees are tied to business, investments, or taxes.
2. Keep Detailed Records: Save receipts, invoices, and any descriptions of the legal services provided.
3. Use the Correct Tax Form:
   
   • For business expenses, report the fees on Schedule C (for self-employed individuals) or your business tax return.
   • For investment-related fees, include them on Schedule A as itemized deductions (if applicable).
4. Consult a Tax Professional: A tax advisor can help you navigate the rules and ensure compliance.

Strategy Tip: Try to group deductible legal expenses within the same tax year to maximize their impact. For example, if you know you’ll have legal fees in December and January, aim to consolidate them in December so you can claim the deduction sooner. Additionally, work with specialized legal professionals who understand your specific needs—they can save you time and money.

FAQs

Can I deduct legal fees for a discrimination lawsuit? 

Yes, if the case involves unlawful discrimination or certain whistleblower claims, legal fees may be deductible above-the-line, meaning you don’t need to itemize deductions to claim them.

Are legal fees for estate planning deductible? 

Only if they’re directly tied to managing taxable, income-producing assets. Drafting a personal will isn’t deductible.

What about legal fees for settling alimony or child support disputes? 

No, these are personal expenses and aren’t deductible.

How will the TCJA changes affect future deductions? 

If the TCJA expires in 2025, previously deductible personal legal fees might be reinstated. Stay informed about legislative changes to adapt your tax planning.