When incurred by a business, legal fees are generally deductible as an ordinary business expense. However, legal fees for personal matters are deductible as miscellaneous itemized deductions only if they are incurred for the following services:
- The collection or production of income.
- The management of income producing property.
- The resolution of tax matters such as tax determination, collection or refund.
In addition, there are certain personal matters for which legal fees may be deductible. Some of these include the following.
Executor’s commission. An executor who incurs legal fees to obtain taxable income can claim a deduction.
Probate. Legal fees paid for probate by an estate are deductible on the estate tax return, but strong substantiation of the legal time involved is necessary.
Social Security. Legal fees incurred to collect Social Security benefits are deductible to the extent that the Social Security benefits are taxable. For example, if one-half of the benefits are taxable, then one-half of the legal fees are deductible.
Alimony. Legal fees incurred for the receipt of alimony are deductible. To support this deduction, your attorney must give you an itemized bill that shows how the legal fees were allocated to tax and to non-tax matters.
Personal injury suits. If damages are awarded for lost wages, the portion of the legal fees attributable to recovery of the wages is deductible.