Before the U.S. Tax Code changed in 2018, many Americans enjoyed deducting legal fees for real estate and other investment transactions. Unfortunately, the legal fees for such personal legal matters are no longer tax-deductible.
That being said, there are still exceptions, but you should check with a tax preparation specialist regarding potential deductions in your situation.
Tax deductions: What qualifies and what doesn’t
Fees for many personal legal matters are no longer tax deductible. This includes fees in areas like:
- Family law: divorce, custody, breach of marriage promise
- Estate planning: drafting wills and trusts, or probate
- Real estate law: property sales and purchases
- Lawsuits for compensatory damages, including services from a Florida personal injury lawyer
- Criminal charges
- Tax preparation, planning, advice, and audit defense
People who spent money on legal fees to defend their reputation or protect themselves from accusations made in the course of a political campaign may not deduct these fees from their income taxes.
As we mentioned, a few types of legal and attorney fees remain tax-deductible. That being said, it’s crucial that you keep documentation to back up your exemptions in case the IRS decides to audit your taxes.
Some legal fees that still qualify for tax exemption include:
- Personal legal fees in cases of employment discrimination or whistleblower legal actions
- Many business legal fees
Some military members and contractors may be eligible to file a personal property damage lawsuit against the U.S. government to recoup economic losses. These individuals may be able to deduct the attorney fees for this legal action from their taxes.
(Note: Civilians may also pursue compensation against the federal government for negligence, but compensation is not subject to a deduction on taxes.)
Deductibility of business legal fees
Most business legal fees are deductible from the business’s tax obligation. So long as the fees are paid from the business accounts and not from your personal accounts, you should be able to deduct:
- Drafting and negotiating contracts with customers, partners, and vendors
- Bankruptcy proceedings for the business
- Collections actions against clients, including any associated court costs
- Caring for or otherwise handling income-producing business equipment
- Protecting your trade or business (business-related costs only)
- Defending copyright, patent, or trademark claims
If your business involves leasing real estate properties, both commercial and residential, then you may also deduct any associated real estate legal fees associated with generating revenue from the property, but not the legal costs of defending the property or evictions. However, you may be able to recoup these costs in small claims court.
Claiming your legal fees on your taxes
Legal fees should be itemized on your tax return, which means that you will be ineligible for the standard deduction. It’s important that you correctly itemize or claim these expenses on your taxes, so it’s recommended that you hire an experienced CPA to help you draft and file your taxes.
Ensure that your lawyer’s invoice clearly lists the nature of services provided, itemized if necessary. If the invoice doesn’t state the area of law for which you received legal counsel, you might not be able to deduct it as a business expense.
Final thoughts about deducting legal fees from your taxes
Some tax code changes each year, so what could be deducted for 2022 might not be deductible in 2023. Professional advice can help you determine which fees you can deduct and help you find other ways to reduce your tax liability.
Although we don’t provide tax advice, the expert Florida personal injury lawyers with Lytal, Reiter, Smith, Ivey & Fronrath can help you get the compensation you deserve if you or a loved one were injured in an accident. Contact us today to schedule a free consultation by calling (561) 655-1990.