Are Legal Fees Tax Deductible? What You Need to Know

Legal fees can be expensive, whether you’re hiring an attorney for business, personal matters, or tax issues. But here’s the good news — in some cases, you may be able to deduct those costs from your taxes. The key is understanding which expenses qualify, which don’t, and how to properly claim them on your return.

This guide breaks down everything you need to know about when legal fees are tax deductible, how to report them, and what to avoid.

Understanding Legal Fee Deductions

Legal fees are costs paid to lawyers or legal professionals for advice, representation, or document preparation. The IRS allows deductions for certain legal fees, but only if they are directly related to taxable income or business activities.

The Basic Rule

Legal fees are deductible if they are necessary and ordinary for earning taxable income or maintaining a business. Personal legal expenses, however, are generally not deductible.

For example:

• Deductible: Fees paid for business contracts or tax advice.

• Not deductible: Fees for divorce or personal injury claims.

When Legal Fees Are Tax Deductible

Here are the main situations where legal fees may qualify for deductions.

1. Business-Related Legal Fees

If you own a business or are self-employed, many legal expenses are considered normal operating costs.

Examples include:

• Drafting or reviewing business contracts

• Handling employee or vendor disputes

• Defending against lawsuits related to your business activities

• Getting professional legal tax advice

• Trademark or copyright registration

You can usually deduct these costs as business expenses on Schedule C (for sole proprietors) or through your company’s tax filings.

2. Tax-Related Legal Fees

Legal expenses connected to your tax situation can also be deductible.

Examples include:

• Hiring a lawyer to help with an IRS audit

• Paying for legal representation in a tax dispute

• Getting professional tax planning advice

These costs are generally deductible as a miscellaneous itemized deduction if related to taxable income. However, since the 2017 Tax Cuts and Jobs Act (TCJA), most individual miscellaneous deductions were suspended until at least 2026.

Businesses, however, can still claim these deductions.

3. Employment and Wage-Related Legal Fees

You may be able to deduct attorney fees if they relate to earning or protecting your wages or employment rights.

Qualifying cases include:

• Whistleblower claims

• Employment discrimination or wrongful termination lawsuits

• Wage and hour disputes

If you recover a settlement, you might be able to deduct attorney fees directly “above the line” — meaning they reduce your taxable income before calculating your adjusted gross income (AGI).

4. Investment-Related Legal Fees

If legal services are related to income-generating investments, such as managing rental properties or stocks, they may qualify.

For example:

• Fees paid to an attorney to draft real estate leases

• Legal advice related to investment disputes

• Costs of setting up investment entities like LLCs

These may count as deductible investment expenses when directly linked to earning taxable investment income.

Legal Fees That Are Not Tax Deductible

While the IRS allows deductions for legal expenses tied to income generation or business operations, most personal legal fees do not qualify. These are considered private costs that don’t directly relate to earning taxable income. Even if they have a financial impact, the IRS classifies them as personal matters — meaning they must be paid out of pocket without any tax benefit.

Here’s a closer look at the most common non-deductible legal expenses and why they don’t qualify:

1. Divorce and Child Custody Cases

Legal fees related to divorce proceedings, child custody battles, or alimony negotiations are typically not deductible. The IRS views these as personal in nature, regardless of how they affect your financial situation. Even if you pay an attorney to divide assets or negotiate child support, those costs cannot be written off.

2. Criminal Defense Fees (Unless Business-Related)

If you’re facing criminal charges that are not related to your business or profession, your legal fees are not deductible. However, if the charges stem directly from business activities — such as a company-related compliance issue — those specific costs might qualify for deduction.

3. Personal Injury or Emotional Distress Lawsuits

Attorney fees from lawsuits involving personal injury, emotional distress, or defamation are usually not deductible because these cases do not produce taxable income. Even if you win a settlement, the compensation is generally tax-free, so the related expenses don’t qualify as deductible.

4. Will or Estate Planning Fees

Legal fees for preparing wills, establishing trusts, or managing an inheritance are considered personal financial planning costs, not income-producing expenses. Therefore, they can’t be deducted on your tax return, even though they deal with property or financial management.

5. Buying a Personal Home

Legal costs associated with purchasing or selling your personal residence — such as closing fees or title searches — are not deductible. However, if you buy or sell investment property or business real estate, those legal fees may qualify as business expenses.

In short, the IRS disallows deductions for most legal matters that revolve around personal relationships, private property, or individual finances. Even if the outcome has monetary consequences — like receiving a settlement or paying alimony — the IRS focuses on the purpose of the legal service, not the result.

If you’re unsure whether your legal fees qualify, it’s always smart to consult a tax professional before filing. They can help determine which expenses might be partially deductible or fully excluded under current tax laws.

Mixed-Use Legal Fees: Partial Deductions

Sometimes, legal services cover both personal and business matters. In these cases, you may be able to deduct only the portion related to business or income generation.

Example: If you hire a lawyer to handle both your business sale and a personal property dispute, you can deduct the portion of fees related to the business sale.

Your attorney should provide an itemized invoice showing how much of the work was business-related.

How to Claim Legal Fee Deductions

Claiming legal fees correctly on your tax return is crucial to avoid mistakes or audits.

For Individuals

If the fees qualify under specific IRS rules (like employment claims or tax disputes), you can report them as adjustments to income on Schedule 1 (Form 1040).

For Businesses

Business owners can typically deduct legal fees as business expenses on:

• Schedule C (for sole proprietors)

• Form 1065 (for partnerships)

• Form 1120 or 1120S (for corporations and S-corps)

Keep all receipts, invoices, and detailed documentation to back up your deduction.

IRS Guidelines for Legal Fee Deductions

The IRS Publication 529 outlines which legal expenses are deductible. According to their guidance:

• Legal fees must be directly related to producing taxable income or conducting a business.

• Personal legal expenses are not deductible, even if they have financial consequences.

• You must itemize deductions if you are claiming certain types of legal fees as an individual.

It’s wise to consult a tax professional or accountant before claiming deductions, especially after tax law changes.

Legal Fees for Settlements and Lawsuits

In some cases, legal fees related to lawsuits or settlements can be deducted, but the rules depend on the type of case and who benefits from the income.

Deductible Situations

• Employment-related claims

• Whistleblower cases

• Certain civil rights or discrimination lawsuits

However, for personal injury settlements, the fees are typically not deductible, as the compensation itself is usually non-taxable.

Special Considerations for Small Businesses

Small business owners should pay special attention to how legal fees are categorized.

Deductible legal services include:

• Business formation (LLC, corporation)

• Contract drafting and review

• Lease negotiations for commercial spaces

• Debt collection or defense against lawsuits

Non-deductible:

• Personal matters unrelated to business operations

• Legal fees for purchasing personal assets

Record-Keeping Tip

Keep detailed records of invoices showing the nature and purpose of each legal service. This helps substantiate the deduction if audited.

Tax Changes That Affect Legal Fee Deductions

The Tax Cuts and Jobs Act (TCJA), passed in 2017, suspended many individual deductions for unreimbursed legal fees until 2026.

What This Means:

• Employees can no longer deduct job-related legal expenses.

• Self-employed individuals and businesses can still claim deductions related to income-producing or operational legal costs.

This makes understanding who qualifies and how to categorize expenses more important than ever.

Common Mistakes to Avoid

Avoid these pitfalls when claiming legal fee deductions:

• ❌ Deducting personal legal fees

• ❌ Failing to separate business and personal expenses

• ❌ Forgetting to request itemized billing

• ❌ Claiming non-qualifying legal costs post-TCJA

Always consult a tax professional before filing to ensure compliance.

When to Seek Professional Help

Tax laws involving deductions can be complex. It’s best to seek help from:

• A certified public accountant (CPA)

• An enrolled agent

• A tax attorney

These experts can clarify your eligibility and help you avoid errors that could trigger IRS scrutiny.

Final Thoughts

So, are legal fees tax deductible? It depends on the purpose of the expense.

• If your legal fees are tied to earning or protecting taxable income, business operations, or certain employment-related cases — they’re likely deductible.

• If they’re for personal matters, they’re not.

Understanding this difference can help you save money and stay compliant with tax laws. Keep records, separate expenses carefully, and when in doubt, ask a tax expert for guidance.