Introduction
Legal fees can be expensive, but some may be tax-deductible if they meet IRS guidelines. The Tax Cuts and Jobs Act (TCJA) of 2017 eliminated most personal legal fee deductions, but certain business, employment, and investment-related legal costs may still qualify.
This guide explains which legal fees are deductible, how to claim them, and what IRS forms you need for your 2025 tax return.
Are Legal Fees Tax Deductible? (IRC §162 & §212)
Legal fees are only deductible if they are ordinary and necessary for:
- Running a business or self-employment
- Protecting income (e.g., investment-related legal fees)
- Unlawful discrimination claims
Legal Fees That Are Deductible
- Business legal fees (contracts, lawsuits, tax advice)
- Legal fees related to rental property income
- Legal fees for investment advice
- Attorney fees for unlawful discrimination claims
- Divorce legal fees related to tax advice or alimony
Legal Fees That Are Not Deductible
- Personal legal fees (divorce, child custody, estate planning)
- Criminal defense legal fees
- Lawsuits for personal injury or reputation damage
- Attorney fees for drafting wills or trusts
Business Legal Fees Deduction (IRC §162)
Self-employed individuals and business owners can deduct ordinary and necessary legal fees on Schedule C (Form 1040).
Eligible Business Legal Expenses
- Hiring a lawyer to draft contracts
- Litigation expenses related to business disputes
- Tax-related legal services
- Lease agreements for business property
Example
- Mark, a self-employed contractor, paid $5,000 for legal services to negotiate a contract.
- He deducts $5,000 on Schedule C as a business expense.
Legal Fees for Rental Property Owners (IRC §212)
If you own rental property, legal fees related to managing it are deductible.
Eligible Rental Property Legal Fees
- Eviction costs and lease disputes
- Legal fees for buying, selling, or protecting rental income
- Attorney fees for tenant agreements
Example
- Sarah, a landlord, spent $2,500 on legal fees to evict a tenant.
- She deducts $2,500 on Schedule E (Form 1040) as a rental expense.
Legal Fees for Unlawful Discrimination Claims (IRC §62(a)(20))
If you win a lawsuit for unlawful discrimination, 100% of legal fees are deductible above-the-line (without itemizing).
Qualifying Discrimination Cases
- Employment discrimination (wrongful termination, harassment)
- Civil rights violations
- Whistleblower cases
Example
- David won $100,000 in a wrongful termination lawsuit and paid $30,000 in attorney fees.
- He deducts $30,000 on Schedule 1 (Form 1040).
How to Claim Legal Fee Deductions
Step 1: Identify the Type of Legal Fee
- Business-related? Report on Schedule C.
- Rental property-related? Report on Schedule E.
- Discrimination lawsuit? Report on Schedule 1 (Form 1040).
Step 2: Gather Documentation
- Invoices and receipts from your attorney
- Contracts and settlement agreements
Step 3: Complete IRS Forms
- Schedule C (Form 1040) – Business legal fees
- Schedule E (Form 1040) – Rental property legal fees
- Schedule 1 (Form 1040) – Discrimination lawsuit legal fees
Step 4: File Your Taxes
- Use tax software or consult a CPA for accuracy.
Conclusion
Legal fees are only deductible in business, rental property, or specific lawsuit cases. Keeping accurate records and understanding IRS rules can help reduce your taxable income.
- Need help? Schedule a consultation with Anshul Goyal, CPA EA FCA to ensure you claim the right deductions.
Disclaimer
This article is for informational purposes only and should not be considered tax, legal, or financial advice. Tax laws change frequently, and individual circumstances vary. Consult a qualified tax professional, such as Anshul Goyal, CPA EA FCA, before making any tax-related decisions.
FAQs
1. Can I deduct legal fees for divorce?
Only tax-related legal fees or alimony negotiation fees are deductible.
2. Can I deduct legal fees if I am an employee?
No, except for unlawful discrimination lawsuits.
3. Can landlords deduct legal fees?
Yes, if they relate to rental property management.
4. Are personal injury legal fees deductible?
No, legal fees from personal injury or reputation lawsuits are not deductible.
5. What IRS form do I use for legal fee deductions?
Use Schedule C, Schedule E, or Schedule 1 (Form 1040), depending on the legal fee type.