About Tax Deductions for Legal Expenses

Written by cindy hill
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  • Introduction

    About Tax Deductions for Legal Expenses

    Legal expenses may be tax deductible. Whether or not a legal fee is tax deductible depends on why the legal fees were incurred. Most fees related to personal legal advice are not deductible, while legal fees related to starting or running a business, issues of employment or collecting taxable income, are tax deductible on IRS Form 1040 Schedule C or Schedule A.

    (Cindy Hill)

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    Legal Fees as Business Expenses on Schedule C

    Legal fees incurred in business reformation or related to the ongoing management and operation of a business are considered an ordinary business expense. These legal fees may be deducted by listing on IRS Form 1040, Schedule C, Part II, Line 17, "Legal and professional services."

    Going to Court May Be Tax Deductible ()

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    Legal Fees as Basis of Investment Property

    Legal fees pertaining to the purchase of investment property by a business--such as the title search or contract negotiations for purchase of real estate for a factory--are not ordinary business expenses, and cannot be deducted on Schedule C Line 17. Legal fees for services that facilitate acquiring an investment asset become part of the basis of that investment property.

    Legal Fees are Part of the Basis of Real Property ()

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    Personal Legal Fees

    Most personal legal expenses, such as the fee paid to a divorce lawyer or pertaining to a dispute with neighbours over noise, are not deductible. Legal fees may be considered as part of the total expense of adopting a child, for which there is an IRS adoption tax credit. The limit for this credit changes annually, and may be found at IRS Tax Topic 607.

    Personal Legal Fees Are Not Usually Deductible ()

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    Itemised Deductions on Schedule A

    Taxpayers who are not self-employed or engaged in running their own business may still deduct some legal expenses if they itemise deductions on IRS Form 1040 Schedule A. Most Schedule A deductions have a floor of 2 per cent of the taxpayer's adjusted gross income. This means that if a taxpayer has an income of £32,500, he or she can only deduct so much of their allowable Schedule A expenses over the amount of £650, or 2 per cent of £32,500.

    Some Legal Expenses are Allowable on Schedule A ()

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    Limits on Schedule A Deductions

    There are limits to the total amount of Schedule A miscellaneous deductions permitted to individuals of high income. In 2008, people with incomes of £103,967 or more were required to adjust their Schedule A deductions, including those for legal expenses. The income limit and amount of adjustment will vary each year, so households with higher incomes should check with a tax practitioner. Additionally, taxpayers must choose between the standard deduction and the itemised deduction on IRS Form 1040, so it makes sense to file Schedule A if the total of deductible legal expenses and other itemised deductions are greater than the standard deduction.

    The IRS Limits Schedule A Deductions ()

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    Allowable Schedule A Legal Expense Deductions

    Legal expenses incurred relative to collecting taxable income, such as collecting a debt or pursuing a judgment that comprises taxable income, are deductible. Legal expenses pertaining to acquiring or maintaining income-producing employment also are deductible, including consulting an attorney regarding employment discrimination or hazardous working conditions or reviewing the terms of an employment contract. These expenses may be claimed on Schedule A as Miscellaneous Deductions.

    Lawsuits to Collect Taxable Income are Deductible ()

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    Legal Fees Related to Taxes and Property

    Legal fees related to income tax preparation are deductible. Lawyer's charges for estate planning may be deductible to the extent that they relate to tax consequences or maintaining income-producing assets such as investment funds. As with business investment property, however, legal fees associated with acquiring capital assets like real estate become part of the basis of that capital asset, and are not tax deductible.

    Some Estate Planning Legal Fees are Deductible ()

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