As a rule, the Internal Revenue Service does not allow taxpayers to deduct personal legal fees. However, there are a few notable exceptions. Legal fees incurred in relation to your job, trade or business are deductible. Legal expenses in connection with producing or collecting taxable income are also deductible. If the legal expense has a tax connection, it may also count as a deduction.
Job or Business Expenses
The IRS allows you to deduct legal fees associated with doing or keeping your job. Fees related to civil lawsuits and criminal cases are potentially deductible. For example, any legal fees you pay to defend yourself against criminal charges are deductible, as long as the case stemmed from your trade, job or business. If you bring a wrongful termination case against your employer, those legal fees are also deductible. You are also able to deduct any attorney fees and court costs associated with an unlawful discrimination claim.
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Producing or Collecting Income
Any legal expenses that you incur in an attempt to produce or collect taxable income are deductible. A landlord who sues a tenant for rent can deduct his legal expenses. On the other hand, a person defending herself may or may not be able to take a tax deduction. For example, if you sue an ex-spouse in an attempt to collect taxable alimony, that's tax-deductible. However, the defense fees the ex-spouse pays are not deductible since he's not using the fees to produce or collect income.
Most fees you pay to a tax attorney are typically deductible. That's because the IRS allows taxpayers to deduct all costs associated with determining, collecting and refunding income tax. Normally, legal fees associated with divorce can't be deducted. However, taxpayers can deduct divorce legal fees if consultation included tax advice related to the divorce. If the cost of the tax advice isn't specifically itemized on your legal bill, you must use a reasonable method to allocate the cost of consultation for tax advice.
Claiming the Deduction
Legal fees are deducted as an itemized miscellaneous deduction on Schedule A. Eligible legal fees include attorney fees, prepaid fees, consultations and court fees. Damages and court penalties are not deductible. There isn't a specific line item for legal fees on the Schedule A. However, the IRS instructs taxpayers to detail all legal expenses in line 23, "other expenses." To claim these deductions, you must itemize rather than take the standard deduction. Miscellaneous deductions are deductible only after they exceed 2 percent of your adjusted gross income.