Lawyers are probably one of the most sought-after professionals, especially whenever tax season arrives. However, legal fees aren’t cheap so if you have a serious case at hand, you better make sure you have the funds to spend. Fortunately, in most situations, these fees are tax-deductible especially for business and non-business scenarios. To know which legal fees can cut your tax bill and which are not, we will discuss them in this article to serve as your reference in the future.
What fees can you deduct?
Before anything else, it’s important to know that there are exceptions to the rule but generally, you can deduct legal fees for the following:
What fees can you not deduct?
Personal legal expenses are generally not deductible such as the following:
Tips To Get The Most Of These Deductions
Learn about the 2% rule. Although there are exceptions, generally, taxpayers can deduct only some portion of the qualified legal expenses exceeding 2% of their adjusted gross income. Therefore, if you’re adjusted gross income is $100, 000, you may be able to deduct the first $2, 000 of the legal expenses that passed the qualification requirements. This rule may give a serious limit to the size of the deduction for most taxpayers, but for those who spent a huge amount of money for legal purposes, might still find this useful as it still lessens their tax bill.
Itemize your taxes. This is necessary if you want to deduct legal fees. You cannot do a standard deduction anymore which means you will have to use Schedule A. Yes, you may have to spend more time and effort if you itemize your taxes but it’s worth the price instead of paying a huge amount of tax bill. If you’re confused about this part of IRS regulation, ask for a tax preparer’s assistance to better explain what it is all about. You will use Schedule C if the legal fees you incurred are related to business while you’ll be looking at Schedule E if they’re related to income-generating rental properties.
Ask your Lawyer to itemize the bill. It’s best to itemize bills from your Lawyer in order to figure out what are tax deductible fees and which are not. Make sure your Lawyer correctly and fairly records the expenses you incurred as some of them may trick you from getting more cash from you than what you’re supposed to pay.
Since legal expenses can be a bit complex especially if it involves the tax code, it is best to consult a tax preparer who’s experienced and knowledgeable about the issue. You definitely don’t want to spend for another legal bill so make sure you are able to take control of everything.
Be Transparent With Your Business and Personal Legal Expenses
Most taxpayers incur legal expenses that legitimately business-related which qualify as a tax deduction. However, the IRS is very strict when it comes to this topic so don’t be surprised if one day you find yourself getting audited just because you don’t have sufficient proof that the expenses you have incurred were business related. What you should do is ask a tax professional you help you out in gathering complete and accurate evidence to support your claim for tax deductions for legal expenses. But here’s a simple suggestion: If you’re unsure as to which fees are personal or legal business fees, evaluate yourself by asking, “Would I spend this money if I wasn’t conducting a business?” Lastly, just try to remember the rule of thumb that says: any legal expenses can be deducted as long as its related to producing or collecting taxable income, and calculating, collecting, or acquiring a refund of any tax.
