Lawyer fees can vary widely depending on the nature and complexity of legal services. The good news is that some lawyer fees may be tax deductible, allowing you to lower your tax bill. However, not all legal expenses qualify for a tax deduction. In this blog post, we will explore three key factors that determine if your lawyer fees are tax deductible.
Type of Legal Service
Fees for legal services that relate to your business or income are typically tax deductible. This includes expenses for tax advice, creating a trust, reviewing a contract, or consulting on a work-related legal matter. In contrast, fees for personal legal services are not deductible, such as those related to a divorce, child custody, or preparing a will.
Business vs. Personal Purpose
Only legal fees that are considered an “ordinary and necessary” business expense are deductible. Fees that do not meet this standard, or are incurred for personal purposes, do not qualify for a tax deduction. For example, legal fees to defend yourself in a lawsuit arising from your job would likely be deductible, but fees to defend yourself in a personal injury lawsuit would not.
Form of Payment and Documentation
To deduct legal expenses, you must pay the fees during the tax year in which you claim the deduction. Cash payments, checks, and credit cards are acceptable forms of payment. You must also keep records such as invoices or receipts to prove the fees were incurred and paid. Credit card statements alone do not constitute sufficient documentation.
In some cases, legal fees may be partially deductible if incurred for both business and personal purposes. The fees should be allocated between the deductible and nondeductible portions based on the relative amounts applicable to each purpose. Proper documentation is essential to support the allocation and claim the maximum allowable deduction.
In summary, whether your lawyer fees are tax deductible depends on three key factors: the type of legal service, the business vs. personal purpose of the fees, and proper documentation for fees that were paid. By understanding these factors, you can take advantage of tax deductions for qualifying legal expenses and minimize your tax liability. However, it is always a good idea to consult a tax professional regarding the deductibility of your specific legal fees.