The expertise of a tax attorney isn’t free. It comes at a cost. And if you know anything about legal costs, they quickly pile up. If you’ve hired a tax attorney, you may be wondering if their fees are tax deductible. After all, knowing which expenses qualify for deduction can go a long way in determining your eventual tax liability.
In general, legal fees related to your business are tax deductible, while legal fees incurred on personal issues are not. This distinction can make a big difference when it’s time to file your returns, especially if you’re trying to reduce your overall tax burden.
At Victory Tax Lawyers, we know tax issues can be stressful, and figuring out what you can deduct shouldn’t add to that stress. If you’re struggling with mounting tax debts and need to explore tax relief services, or if you’re unsure about how legal fees affect your taxes, our team is here to help. Contact us today! You’re just one message away from a free consultation.
In this post, we’ll look into the costs of hiring a tax attorney, explore when their fees qualify as deductions, go over the IRS guidelines on deducting legal fees, and explain how to claim tax attorney fees paid on your tax return. By the end, you’ll have a clearer understanding of how tax attorney fees fit into your financial picture and what you can do to make them work for you.
How Much Do Tax Attorneys Charge?
The cost of hiring a tax attorney isn’t fixed. It often depends on several factors, including experience, location, and the complexity of the case involved. For instance, you might pay anywhere from $100 to $400 per hour for a straightforward consultation. Whereas for more complex cases, such as handling audits or perhaps negotiating settlements, you could pay $500 an hour or more. In general, a tax attorney would often charge anywhere between $200 to $500 per hour or $2,000 to $10,000 for flat-rate services.
Beyond fees, understanding the services a tax attorney provides helps you truly appreciate the value they bring to every case. Of course, while it’s not every tax case that requires the expertise of a tax attorney, knowing when to hire a tax attorney is critical. These legal professionals offer assistance in diverse areas, including tax planning, audit defense, IRS negotiations, and legal representation. Without experienced representation, you risk making costly mistakes that could lead to more than just financial losses—they could result in irreversible consequences or, even worse, criminal charges.
IRS Guidelines on Deducting Legal Fees
When it comes to deductions, the IRS is quite specific: you can deduct legal fees that are “ordinary and necessary” business expenses. Personal legal fees, however, are no longer deductible under the Tax Cuts and Jobs Act (TCJA).
Tax Deductible Legal Fees
As we mentioned, the IRS allows you to deduct legal fees that are ordinary and necessary to your business or directly tied to your income-producing activities. Simply put, if the expense is essential for your business, it may be deductible.
This includes:
- Fees related to operating your business, including fees paid for tax advice and preparation, fees paid for drafting and negotiating contracts, fees related to ongoing bankruptcy proceedings for the business, etc.
- Fees paid to resolve tax issues from rental properties or royalties where you earn income.
- Fees associated with farm income or expenses such as fees paid for farm inspection, land dispute, etc.
Additionally, the following legal fees, although not associated with your workplace, are also deductible fees related to whistleblower lawsuits and unlawful discrimination claims and fees incurred on adopting a child if you qualify for the federal adoption tax credit.
What legal fees aren’t tax deductible?
Thanks to the Tax Cuts and Jobs Act, many legal fees that used to qualify as miscellaneous itemized deductions are no longer deductible. Generally, personal legal fees are no longer deductible. According to the IRS, these fees include:
- Fees you pay in connection with the determination, collection or refund of any taxes.
- Legal expenses incurred in attempting to produce or collect taxable income.
- Personal legal expenses such as those for the following: (child custody, breach of promise to marry suit, civil or criminal charges resulting from a personal relationship, damages for personal injury, preparation of a title, preparation of a will, and property claims or property settlement in a divorce.)
The idea is straightforward. On a broad spectrum, only necessary business-related expenses will be considered eligible for tax deductions. Personal expenses no longer qualify for tax deduction. The tax code changes regularly, and we understand it can be hard to keep up. When in doubt, consulting with seasoned professionals like Victory Tax Lawyers can ensure you’re not leaving money on the table. Contact us for a free consultation today, and let’s help you maximize your deductions and minimize your tax liability.
Are Tax Attorney Fees Tax Deductible by the IRS?
Like many other tax questions, the answer to this one is ‘it depends.’ What determines it? What the attorney fee was incurred in the first place. While federal tax laws generally classify personal legal expenses as non-deductible, some states have their own rules that might tip the scales.
For instance, in California, like many other states, businesses can only deduct tax attorney fees when they are considered ‘ordinary and necessary’ expenses directly related to the business’s operation. Interestingly, in Canada, personal legal fees can be deductible when they are incurred to recover amounts owed, such as unpaid wages.
When Are Tax Attorney Fees Deductible?
Typically, you can claim a deduction on your tax attorney fees when:
1. The fees are incurred for business-related tax issues – Legal fees that were strictly incurred for your business, such as fees paid for audits, compliance issues, or tax planning, are considered tax deductible.
2. The fees are associated with income generation – Attorney fees incurred on generating additional income for your business, such as fees incurred on legal advice for investments, rental income, or royalties, generally qualify.
3. Self-employment deductions – Self-employed individuals can deduct legal fees related to their trade or business. For example, fees paid to hire a tax attorney to negotiate on your behalf during an IRS audit of your business income would be deductible.
When Are Tax Attorney Fees Not Deductible?
Not all legal fees qualify for a tax break. Here are some cases that won’t meet the tax cut:
1. Personal Tax Advice – Fees that relate to non-business tax issues or tax advice, such as filing your personal taxes or handling disputes over your individual tax refund, aren’t deductible.
2. Criminal Tax Investigations – If you’re facing criminal charges for tax fraud or evasion, the legal fees incurred in your defense typically don’t qualify for a deduction, especially if the issue isn’t linked to a business.
3. Non-Business Tax Disputes – Disputes over personal tax issues, such as challenging penalties on your return or addressing other IRS-imposed punishments, aren’t deductible.
4. Personal tax expenses – All fees incurred on personal expenses such as fees on will contests, disputes over inheritance, custody battles, divorce proceedings, house purchases, personal vehicle purchases, and the rest are not tax deductible.
How to Claim Tax Attorney Fees on Your Tax Return
Now that you know how to identify tax-deductible fees, the next step is knowing how to claim those fees on your tax return. We’ve broken down the steps below:
1. Itemize Your Deductions
The first thing you need to do is itemize your deductions rather than take the standard deduction. The standard deduction reduces your taxable income by a fixed amount. In contrast, itemizing your deductions allows you to list specific expenses, like tax attorney fees, that might eventually add up to more than the standard deduction.
Tax attorney fees typically fall under the “Other Expenses” category when itemizing on Schedule A of your Form 1040. If you’re still unsure which fees qualify for a tax break, you need to hire a tax attorney to help you so you don’t make mistakes.
2. Document All Fees
Documentation is everything when dealing with the IRS. Make sure you’re keeping thorough records of all legal fees, including invoices, contracts, and receipts. Confirm that these documents clearly specify what the services were for—whether it was a consultation, tax dispute resolution, or negotiating with the IRS on your behalf.
For example, fees paid to resolve a tax dispute related to your business income would generally be deductible. Conversely, attorney fees for personal tax advice or assistance with a criminal tax case won’t make the cut.
If your attorney gives you an invoice that doesn’t specify the type of legal services rendered, ask them to amend it so that fees for deductible and nondeductible services are clearly outlined. That way, you can easily substantiate the fees you deduct from your taxes.
3. Report Fees on the Tax Return
Once you’ve confirmed which legal fees are deductible, the next thing is to report them correctly. Here’s how you should go about this:
- Complete Schedule A on your Form 1040.
- Locate the “Other Miscellaneous Deductions” section.
- Enter the total amount of your deductible legal fees.
4. IRS Forms & Supporting Documentation
In addition to Form 1040 and Schedule A, it’s advisable to keep handy all supporting documents, such as detailed invoices and statements from your attorney specifying the services they have provided. While you may not need to submit them with your return, they are necessary since the IRS can request verification at any time.
5. Consult a Tax Professional
Tax laws are complex, and the tax codes are almost always changing. Consulting a tax professional is your fail-proof way of ensuring you claim your deductions correctly, especially if you have a complicated case.
If you’re wondering where to find an affordable tax attorney, you might want to consider looking for local referrals or checking online directories focused on legal services. Many professionals also offer free consultations to help you assess your needs and budget.
How to Budget for Tax Attorney Fees
With a bit of planning and budgeting, you may be able to keep costs under control. Here are some ways to take control of your budget:
1. Get a Detailed Estimate
Before you hire an attorney, discuss their fees in detail. Get clarity on their billing structure. Do they charge hourly, offer flat fees, work on contingency fees, or prefer a retainer? Understand what happens to unused retainer funds. Ask about payment plans and any potential additional costs. Make sure you know to the letter what services are being covered in your payment.
2. Set a Budget for Legal Services
Decide how much you’re willing to spend and stick to it. Don’t be afraid to discuss payment options or negotiate a flat fee if that works for you. The point is to be clear about the payment terms from the start so that you don’t encounter surprises down the line.
As we mentioned, attorneys set their fees based on different factors. This means you may get the same service at a more affordable or pricey rate, depending on who you’re meeting. But as we all know, the cheapest option may not provide the best service. Value and expertise often justify higher rates, so rather than sacrifice value, aim for a balance between cost and quality.
3. Keep Track of Billing and Hours
Ask for itemized billing so that at the end of the day you’re only being billed for the services they provide. If you’re being charged by the hour, make sure you’re keeping an eye on the time spent on your case. If you need to ask your attorney upfront what you’re being billed for, do so. Transparency is right once you’ve made a financial commitment.
4. Consult Before Taking Action
Sometimes, a consultation alone is all you need. Use initial meetings to evaluate whether there’s a need for full representation. A good tax attorney can save you money and problems in the long run, so take your time to make the best choice for you. In doing so, prioritize value cost.
Need Help with Tax Issues?
Tax attorney fees generally fall under two broad headings: business-related fees and those incurred for personal reasons. Business-related fees are, by law, tax-deductible, while personal legal fees are often not. By itemizing your deductions and keeping thorough records of your legal expenses, you can ensure you’re maximizing your potential savings.
Keeping up with the deductions you qualify for, especially when there are tax laws surrounding each fee, can be difficult, which is why most people opt to have a professional handle it. At Victory Tax Lawyers, we take pride in providing personalized service tailored to each client’s unique tax needs. If you’re facing tax challenges, don’t go through it alone. Let’s help you get through it. Reach out today to schedule a free consultation.
