Are attorney fees deductible?
The answer is, “It Depends". For business returns, attorney fees incurred by a business for business matters are most often considered tax deductible expenses.
The real question arises in regards to personal tax returns. Prior to the Tax Cut and Jobs Act (TCJA), attorney fees were deductible as a miscellaneous itemized deduction subject to the 2% limitation. However, Section 11045 of the TCJA suspended most Miscellaneous Itemized Deductions, including most attorney fees, through 2026.
Allowable attorney fees are included as an adjustment to income on Schedule 1. If the taxpayer received an award for a claim (1099-MISC Box 1) and attorney fees were deducted (1099-MISC Box 10), then fees are deductible as long as they were paid in same year as the award. Ensure that Box 1 includes gross proceeds (i.e. attorney fees are included in Box 1).
Personal legal fees that are deductible:
- Discrimination claims:
- Civil rights
- Some whistleblower claims:
- Federal whistleblower statute I.R.C. section 62(a)(21) allows for the deduction of legal fees incurred in connection with a federal tax whistleblower action that results in an award from the IRS.
- Under I.R.C. section 62(a)(20), any action brought under the federal False Claims Act can qualify for an above-the-line deduction of legal fees.
- An SEC or Commodity Futures Trading Commission (CFTC) whistleblower receiving an award from the SEC whistleblower program or CFTC whistleblower program can now claim the attorney’s fee as an above-the-line deduction.
When attorney fees are deductible, they are deductible ...
- only if paid within the same year as the recovery of claims, and
- do not exceed the amount of recovery.
Personal legal fees that aren't deductible:
All other personal legal fees are not deductible, including but not limited to the following:
- Custody of children
- Breach of promise to marry suit
- Civil or criminal charges resulting from a personal relationship
- Preparation of a title (or defense or perfection of a title)
- Preparation of a will
- Property claims or property settlement in a divorce-even if the result of the legal proceeding is the loss of income-producing property
- Legal fees related to producing or collecting taxable income or getting tax advice
- Damages for personal injury (except certain whistleblower claims and unlawful discrimination claims)
To enter attorney fees in TaxSlayer ProWeb, from the Federal Section of the tax return (Form 1040) select:
- Other Adjustments
- Certain Attorney Fees - the amount entered will be coded UDC in Schedule 1.
Reminder: Total recovery (awards for claims) must be included in income at the gross value regardless of whether the taxpayer is allowed to claim attorney/legal fees against the award. Always report all rewards at gross value; do not net with any costs.
Note: This is a guide to entering attorney fees in TaxSlayer Pro. It is not intended as tax advice.