(Not intended as tax advice)
There are multiple reasons why an individual or business may require legal representation. And though you may settle or win your case, the cost to hire an experience law firm isn’t cheap. What you may not realize is certain attorney fees may qualify you for tax deductions, which can help lower your tax bill and save you money on your return.
About Deducting Legal Fees
Changes to Miscellaneous Itemized Tax Deductions
Starting in 2018, you are no longer allowed to deduct “legal fees related to producing or collecting taxable income or getting tax advice,” and “fees paid to defend charges that arise from participation in a political campaign,” (IRS.gov). This means that under the Tax Cuts and Job Act, individuals are no longer able to deduct personal or investment-related legal fees, such as will and estate planning, custody disputes, settlements where you received tax-free money, property and title disputes, personal injury cases, or fees associated with your participation in a political campaign.
Itemizing Is Key
According to NerdWallet, “itemized deductions are basically expenses allowed by the IRS that can decrease your taxable income.” Whether or not you choose to itemize your taxes or take the standard deduction, however, will depend on how much you spent in legal fees that year. This is where the 2% rule will come into play. How this works is an individual is only allowed to deduct a certain portion of legal expenses that exceed 2% of their AGI (adjusted gross income). Certain exceptions will apply.
In addition to itemizing your tax deductions, be sure to request that your attorney itemizes your bill. This will allow your CPA to identify which expenses qualify for tax deduction and which ones do not.
Business Legal Fees
If you own a business and require professional legal representation, you may be allowed to deduct your attorney fees as a business operating expense. Legal services that may qualify for deduction include contract drafting for business-related products or services, work-related disputes, and collecting money owed to your company.
Tax laws change every year, so it can be difficult to understand whether or not your legal fees (or a portion of them) qualify for a tax deduction. When you hire an experienced law firm, like KTF Law Firm, you’ll never have to worry about missing out on a tax break associated with your legal fees. We’ll assist your tax professional in itemizing your bill, so you have a clearer picture of what to expect and plan for on your return. If you are in need of professional legal representation for your family or your business, contact us today!